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Wednesday, August 20, 2014

What is business value of your company?

How to fix price when you sell your company? Normally under following 3 methods one who starts negotiating with prospective buyer:
  1. On the basis of future profit: Currently company is making yearly profit of Rs.3 crores. At least 10 years profit seller should get while selling his company. So company's value on the basis of profit is 30 crores
  2. Asset basis: Company's land value is Rs.20 crores, Current realisable Machinery value is Rs.10 crores, Inventory is valued to Rs.6 Crores and Debtors value is Rs.10 crores. Account payable is 5 crores. Final amount is 41 crores.
  3. Capital Basis: Suppose one who wants to setup a new factory instead of buying old one, he has to find out capital for setting up a new factory. The value for land is 20 crores, Machinery value is 15 crores, Raw material and other parts Rs.4 crores, Working capital until getting first sale cycle is 4 crores and other sundry expenses is 1 crores. Total amount would be then Rs.43 crores.
The average of above 3 methods [(30+41+43)/3] is 38 crores rupees.

In addition to Rs.38 crores we have to add goodwill of this company, considering company is running for 5 years. Its estimated value is about 5 crores. [Goodwill value is based on estimation.] So final value is  43 crores.

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