Coming in as a consultant I usually want to quickly assess the value of a company. Those in charge need to also be able to quickly measure values of their organization, be it the entire operation, subsidiary, or other distinct operation. Such enables you to recognize where you need to improve. Also in mergers and acquisitions discussions, you must be firmly aware of such values if you hope to successfully negotiate. Here are ways of estimating value. Please realize that each has its own deficiencies, but taken together will provide you with a better frame of reference.
Capitalize the cash flow. Probably the best method is to find the present value of the entity’s future net cash flow and discount them at an interest rate that reflects the riskiness of the business. The only problem is that as you go further into the future, the numbers take on more of a guessing game.
Estimate your net worth. What is the equity on your balance sheet? This provides you with a book value for your company, which can always be a good starting point.
Establish a liquidation price. What is the lower limit on your market value or the net amount realized by selling your assets and retiring your debt? Be aware that this doesn’t value the operation “as is” as a going concern.
Calculate the value of your stock. If you have so many shares at such a price per share, then the value is the product of the two numbers. This is a quick and easy number, but may be difficult for entities not publicly traded. In that case, you will also have to factor in like-industry estimates for prices per share or multiples times earning figures.
Review any purchase offers. Your company’s value is ultimately whatever a buyer is willing to pay. Sellers typically overvalue their company. If you have no buyers at the price you estimate, your estimate is unrealistic. While you might toss aside “low ball” offers, do consider the average of them.
How is your industry trending? The best company in the world may have little or no value if the outside perceptions and expectations are low, take the “horse and carriage” industry for example. On the other hand, a poorly managed company in a growing highly anticipated field, such as health and aging or green energy for example, may have much higher market value based upon perceived future prospects.