How to sell your business by Enrique Quemada Clariana

Author:Enrique Quemada Clariana [Clariana, Enrique Quemada]
Language: spa
Format: mobi
Tags: Negocios y finanzas personales
Published: 2013-01-02T14:00:00+00:00

d.Determine the discount rate to apply

Once we have got the cash flows, residual value and discount rate, we can calculate the current value of the company.

We calculate the current value of cash flows using the capitalization formula; add the residual value and discount it at the risk rate or the required rate of return.

To value the current enterprise value (EV), various free cash flows (FCF) are discounted by the weighted average cost of capital (ko) plus the company’s residual value (RV) at moment N, also updated to the present moment at the rate ko.

During the valuation, we make many assumptions about the future and the future is always uncertain. Therefore, it is good idea to vary factors affecting the assumptions in order to reach a “value range” and not a specific range. It doesn’t make any sense to conclude that your company is worth 18.756.543 Dollars. It would be more logical to consider that it is worth somewhere between 18 and 20 million Dollars.

Nor does it make sense to tell the buyer, “look, my company is worth this and this is the discount rate that should be applied”. You see your company’s risk and potential one way and a buyer will see it in another way. You can’t force your vision onto the buyer; he has to make his own calculations before establishing his perception of profit and risk. From there he will know how much he is willing to pay.

Your mission is to try to discover how much the buyer is willing to pay. You will do this by asking a lot of questions and trying to analyze your company in the same way that he will. We will learn more about these techniques in the chapter on Negotiation.

We have also calculated the current company value, but this isn’t the value of your shares. Bear this in mind because it can easily lead to misunderstandings.

Company and share value

Applying this discount rate to cash flows can tell you the current value of the company. Just as the value of a house is what you have paid plus the mortgage. When you sell a house for a million Dollars with a mortgage of 700,000 Dollars, you only receive 300,000 in cash; the value of your part is 30% and the other 70% is the debt value that belongs to the bank. The same goes for businesses. In table 11 you can see how to calculate equity value.

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