Buying an asset for the best price is a matter of negotiation. But if you are considering an acquisition, you should apply the best methods available to evaluate the target business.
Even if you are only considering a merger, you should be aware of how much the other business is worth alone and what value is added to your organization.
This is the net asset value of the company, as stated in the audited accounts, less outstanding liabilities to creditors, taxes, bank loans, financing and other liabilities owed. The net amount, before the perceived value, provides a baseline from which to begin the valuation process.
Compare the cost of acquisition with the cost of starting up a similar business, which might include the assets, product development, employment and marketing costs. Include any savings you can foresee by merging the business with your own.
Forecast the target's cashflow for a number of years consistent with the sector it is included and discount these numbers to obtain a net present value. Farming are different of mining and different of industry or other sector. If you are unfamiliar with this method, an industry expert will be able to advise on how to choose and apply discount factors.
A P/E ratio is calculated by dividing the company's share price by its earnings per share. If the company's share price is $15 and it is earning $3 per share, its P/E ratio is five.
To use P/E to value a privately-held business, look up the P/E ratio for the relevant sector in some reference business media to get an initial benchmark that will position the business-target aligned to your expectation and apply a discount. Businesses not in the stock market are cheaper because are not as liquid a those in the public domain.
Valuation and Risk Analysis provides a complete examination of cash flow and credit, from how traditional analysts value a company and spot market mispricing to working with the most recent financial innovations, including derivatives, special purpose entities, pensions, and more.