How many years of cash flow one should summarize to calculate value of a company?

I am in process to valuate my company with purpose to sell part of it.





It looks like valuation using discounted cash flows is one of best methods.





What I do not understand - how many annual free cash flows (with discounts of course) should be summarized in order to determine company value?|||Ivan,





Plain and simple. Discounted cash flows are just one method of company valuation and there is no rule of thumb for its horizon. Keep in mind that there is a difference between the price of a company and the VALUE of a company. Meaning, a company may be worth 1 million in your hands and 2 million in hands of the competitors. This due to sinergies and other benefits a competitor may be able to generate.





EBITDA (Earnings before interest, tax, depreciation and goodwill amortization) is the predominant measure use for valuation. Basically take your operating profit and add back your depreciation. This would equal to the cash generating capacity of the company.





Let the competitors know you are selling and disclose some key information, such as net sales and some margins. Do not give it all away. Tell them you are in the process of selecting a candidate. Once you have several interested parties, sign a confidentiality agreement with two or three top candidates and NOW you may start disclosing key financial indicators.





Best approach is to set a base price of 3 to 5 times EBITDA. The with your prospective buyer, start working in order to see hoy much the company may be worth in THEIR hands. This may increment the company's value. For example, if you own 30% of your niche and your competition another 30%, means having control of 60% allows less investment in advertising (as you're not competing that heavily), more negotiation muscle with suppliers and customers, etc.





By this means both parties will be able to assign a value that will both allow you to sell at a good price, while the buyer gets a good value.





Good luck. Remember being open and honest about your business will pay off. Surprises during due diligence erode much buyer goodwill and price.|||it's a bit tricky





typically people do (1) discount cash flows until some horizon, typically 5 to 10 years out, and (2) compute a "value in perpetuity", assumed to be the value for the period when the company will have stopped growing faster than the rest of the world.





the problem is that, typically, the value coming from part (2) is often large. And for young, fast-growing, cash burning companies, the value from part (2) may be ALL the value, while the value from (1), i.e. the discounted cash flows, may be zero or even negative. At the opposite, for ex-growth companies, all or most of the value may be in phase (1), while there may be little / no "terminal value".





If you've got a company to value that is not listed on the stock market but has competitors that are listed, the best is to:


- do a discounted cash flow valuation exercice for some of these competitors, and adjust the parameters until the value you get, corresponds to their current market value


- then, apply the same parameters to the company you are attempting to value








Hope this helps