Valuation of Business
A business may be valued for different type of reasons that as for merger, acquisition, or takeover or liquidation or outright sale. During purchasing a business, a buyer will be interested in not just the assets also for the future income this business is expected to create.
Theoretical value - within theory, if a purchaser buys a business, he is only buying a stream of future income flows and to arrive on the real purchase price the buyer will:
a) Consider the estimated probable cash flows.
b) Discount cash flows to their current value.
c) Add together the split amounts to provide the present value of income stream. Whereas future income flows are constant:
PV= C (1-(1+r)-n/r)
Where like: PV = Present value of income stream
c = Inflow per annum
r = Discounting rate
n = Number of years the inflows will last