Understanding the Discounted Cash Flow Method, and How to Use It
Recent statistics reveal that in 2021, the median sale price for small businesses was up 16% over the previous year. Median cash flow was up, too, by 11%. With a promising market, now is an excellent time to consider selling.
Before you decide if it is the best time to sell, you must determine what your business is worth. To determine business value, you must calculate your discounted cash flow. This is an analysis that investors and buyers will look at when they consider if your business is right for them and if the price is right.
If you are considering selling anytime in the future, keep reading for the full scoop.
What Is Discounted Cash Flow?
It’s a valuation technique. Discounted cash flow uses expected future cash flows along with a discounted rate. It estimates an investment’s present fair value.
This calculation focuses on TVM or the time value of money. TVM is a concept that professionals refer to when they believe that today’s money will be worth more tomorrow. It assumes that the dollars you use today will appreciate by investing today.
For modern finance, this is a pillar idea.
Why it’s Important
This model can estimate an asset’s value. It is a fundamental cash flow analysis technique. Discounted cash flow is both qualitative and quantitative by nature.
With the detailed assumptions from a DCF model, it can forecast future cash flow and potential business growth. Analysts must spend a lot of time with these assumptions, including considering environmental, economic, and social issues which can affect the cash flow in the future.
Estimating a Business Value
A discounted cash flow analysis is an industry-standard and comprehensive way to estimate an investment’s fair value. It helps to determine what a business will be worth.
There is a wide variety of data to consider when calculating discounted cash flow. This includes tax rates, the WACC, and the cost of equity.
WACC
The acronym stands for “weighted average cost of capital.”
It calculates an organization’s cost of capital. You weigh each category of capital proportionally. All sources of capital, which can include bonds, preferred stock, common stock, and other long-term debt, are a part of the WACC calculation.
Free Cash Flow
FCF is critical to the DCF model. It reduces the noise that financial reporting and accounting policies can create. A vital benefit of the discounted cash flow valuation is that this approach does not rely on market wide over or under-valuation.
It is imperative that the data in the discounted cash flow analysis is accurate. Otherwise, it will not be effective for your organization.
How Do You Calculate a Discounted Cash Flow?
It is a progressive and cumulative process because DCF depends on free cash flow. Free cash flow is how much cash a business creates following all cash outflows.
Accounting policies significantly impact financial statements because they include non-cash expenditures. Free cash flow measures profitability.
Here is the formula for finding free cash flow.
Free cash flow equals interest expense plus cash flow from operations, then subtracts tax shield on interest expense, and then subtracts CAPEX (capital expenditures).
Although, there are other ways you can calculate your free cash flow, too. Here are two more formulas.
Free cash flow equals [(1-Tax Rate) x EBIT] plus non-cash expenses, minus liabilities/change in current assets, and then subtract CAPEX.
Free cash flow equals interest expense plus net income, minus tax shield on interest expense plus non-cash expenses, minus liabilities/change in current assets, and then subtract CAPEX.
All these formulas will do the trick. Which one you use should depend on the information you have readily available.
Calculating Discounted Cash Flow
You can use this formula after you determine your free cash flow. Remember, the DCF relies on the discount rate. Here is the basic formula.
Discounted cash flow equals FCF1 divided by (1 plus r)¹, plus FCF2 divided by (1 plus r)², plus FCFn divided by (1 plus r) n.
Here are the different free cash flow figures and how you find them.
- FCF is the free cash flow for any given year
- FCF1 is the free cash flow for year one
- FCF2 is the free cash flow for year two
- FCFn is the free cash flow for each additional year
“N” stands for each additional year. “R” is the discount rate.
Why You Need DCF For Business Value
Discounted cash flow analysis is how you can provide a case for a company or asset’s present value and how much it could make a buyer in the future. You want to tell a story that your company or asset is making a certain amount today but will be much more worthwhile in the future. Investors and buyers want to see proof of business growth.
Projections can only go so far. Five to ten years is a typical timeframe for estimating future value.
The DCF Valuation method is sensitive to assumptions. Any minor tweak can make a tremendous fluctuation.
Get the Best Brokerage Service
If you are unsure about your discounted cash flow analysis, ask a professional to help. Fusion Business Services has been helping organizations for years determine their DCF and their business sales options.
They begin with an in-depth planning session that is totally confidential. If you have something on your mind regarding your business value, the professional at Fusion Business Services has the answers.
Contact Fusion Business Services today to learn more.
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Business Valuation: The Process and Methods (Explained)
There are more than 33 million small and medium-sized businesses scattered across the US. Many of those businesses are concentrated in urban areas, such as the metropolitan St. Louis area. The simple population density concentrates people with entrepreneurial leanings into a small area.
Despite all of the hard work and long hours, often 50 hours a week or more, there does come a time when most business owners are ready to pack it in. If they want to sell the business, rather than simply close, they’ll need a business valuation.
Not clear on the nature or use of a company valuation? Keep reading and we’ll cover the essentials of the valuation process and methods.
What Is a Business Valuation?
In simple terms, a business valuation aims at creating a realistic assessment of the business’s economic value. Some business valuations assess the value of the entire business, while others only look at evaluating part of the business.
For example, let’s say that you run a medium-sized manufacturing concern. You have two production plants that serve two different kinds of clients.
Let’s say that you’re the sole owner and want to retire. If you don’t have someone in mind to take over the business, you may decide to sell it.
If someone comes along and only wants to buy one of the production plants, you’d do a partial business valuation. If someone wanted the whole business, you’d do a full valuation.
Uses
The most recognizable use of business valuations is for the purpose of selling the business. It’s not the only potential use for a valuation.
In some cases, potential investors might want a valuation before deciding if or how much they’ll invest. Business valuations happen sometimes during divorces to ascertain the full scope of the couple’s assets.
You might also want a valuation for tax planning, estate planning, or even for mediation with stockholders.
What Is the Business Valuation Process?
The exact steps taken in a business valuation process depend in part on the particular valuation method selected. We’ll cover the main methods below. What follows is a general sequence of events that occur in most business valuations.
Determining Scope
The individual or company providing the valuation will look for clarity about the scope of the valuation. For example, are they determining a value for the entire business, part of the business, or a specific number of stock shares?
As part of this step, they’ll also want a specific date for setting the value, since the total value can fluctuate over time. In many cases, they’ll simply set the date for the business’s most recent tax filing.
You must clarify what the report is for. If you need it for estate planning, rather than litigation, the depth of the valuation may vary. They’ll also need to know what kind of report you need, as reports can range from basic summary reports to in-depth reports.
Document Production
The valuation service will likely ask you for a lot of documents. The exact documents will vary from business to business and industry to industry.
For a retail business that depends on a high volume of transactions, the company may want fairly in-depth sales reports. For a business that makes approximately 6 custom yachts per year, a profit and loss statement might suffice.
In most cases, the company will provide a specific list of documents it wants.
Analysis
The valuation service will then analyze the information. They’ll typically compare it with industry information, since this can shed light on whether business profitability is average, above average, or below average.
Management Discussion
Depending on the analysis results, the valuation company may also come up with a set of follow-up questions for the owner or management team. This kind of management discussion typically focuses on clarifying information or understanding factors that the documents may not make clear.
Final Analysis
After that discussion, the valuation company will use one of the methods below to develop a final valuation. They’ll issue a report that the business owner can then provide to potential buyers.
This process can move quickly or slowly, depending on the size, complexity, and industry of the business.
Business Valuation Methods
There are several business valuation methods that a valuation company might employ to value a business. Let’s take a quick look at the most common approaches.
Book Value
Book value is one of the simplest approaches. It essentially adds up all of the assets on the business’s balance sheet. Then, it subtracts all of the liabilities on the balance sheet from the total asset value.
Liquidation Value
The liquidation value assumes that you own a distressed business. This approach adds up the value of your assets and subtracts a percentage from that value for a final value. The valuation company must determine the exact percentage it will subtract.
Market Value
Market value can take a couple of forms. A basic market value approach simply multiplies the number of shares in a company by the going sale price of that stock.
A more complex version compares similar companies to arrive at a relative value for the business. This approach can provide a better real-world picture, but it is also subject to market errors like as an industry bubble overvaluing businesses.
Discounted Cash Flow
The discounted cash flow approach assesses the immediate value of predicted future profits. In this approach, the size of the discount applied to that value reflects the risk that the business will underperform.
Each approach has benefits and problems. Ideally, you should get multiple valuations based on different valuation methods for a clearer picture.
Business Valuation and You
Business valuation is a tool that you can use to determine a realistic asking price for a business you want to sell. There are several possible valuation methods that you can use, but multiple valuations give you the most clarity about your business’s ultimate value.
Fortunately, while the methods of business valuation can prove complex, you can hire someone else to take on that headache.
Fusion Business Services helps St. Louis-area business owners value and sell their businesses. For more information or to schedule a consultation, contact Fusion Business Services today.
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8 Important Things to Know (And Ask) When Buying a Restaurant
Nothing comes close to the exciting buzz of opening a new business. However, the average startup costs for a new restaurant business are between $275,000 and $425,000. Buying an existing restaurant could be the perfect option if you want to avoid the turmoil (and startup costs) of starting one from scratch.
Before you jump into your new venture, there are some essential things to consider. Firstly, running a restaurant is not for the faint-hearted! It would help if you also researched the prospective restaurant thoroughly to avoid any nasty legal surprises.
This guide will walk you through what to know (and ask) before buying a restaurant.
1. Why is the Owner Selling the Restaurant?
Is the owner retiring or starting a new venture? Understanding why the owner is selling their restaurant can provide insight into how the business is performing. Speaking to the owner is also a great way to learn about the brand and story behind the company.
Working with a professional, knowledgeable business broker can help you gain access to helpful information and uncover the seller’s motivation for selling. A broker can use this information to negotiate a better price for the buyer.
If the owner struggles to generate profits, you may need to rebrand and make drastic changes. If the restaurant was successful, would they be selling it? Remember that you will inherit the good, the bad, and the ugly when you buy a restaurant from the previous owner.
2. Location, Location, Location
The best way to research a location is to visit as a customer. Check out the area and take notes on the competition. Your findings will give you an idea of whether the site is popular and how other businesses perform in the vicinity of the restaurant.
Learning about the location will also tell you if the rental rates are fair for your property. Crime rates and new developments can also have an impact on the performance of a restaurant.
3. What is the Restaurant’s Reputation?
You can ask the locals what they think of the restaurant as you research the local area. Do they dine in or take out? Do they enjoy the food?
Lots of restaurants have loyal customers who visit them regularly. Observing the restaurant from a customer’s perspective will allow you to identify whether your prospective restaurant has a loyal following that you will inherit.
Checking online reviews will give you an idea of the restaurant’s reputation within the local community and beyond. Pay attention to negative feedback and consider how you would address their issues when you take over the restaurant.
4. The Competition is Fierce
There were 660,936 restaurants in the US as of 2021. Your restaurant must have a unique selling point if you want to succeed in the restaurant industry. It’s a good idea to include a non-compete clause in your contract to prevent the seller from opening up a similar restaurant nearby.
Establish the restaurant’s unique selling point (USP) by conducting a competitive analysis and tracking industry trends.
5. Existing Employees
When you buy an existing restaurant, you also take on the staff. Identifying which employees are critical to the restaurant’s success should be part of your due diligence before you complete the purchase. Some employees may wish to terminate their employment if a new owner takes over the restaurant.
Your new employees are a direct connection between you and your new customer base. They can teach you everything there is to know about your new business and how to help it succeed. Taking their opinions on board will be crucial to your future business strategy.
6. Check the Licenses and Permits
You may need to apply for state-specific licenses and permits to run your restaurant. Your restaurant must have a liquor license if you sell alcoholic beverages. It is also worth checking if any violations or outstanding debts could jeopardize the restaurant’s success.
Does your restaurant use a dumpster for garbage disposal? You may need a dumpster placement permit. Licenses and permits vary depending on your location, so it is best to check with your local authority before you sign the contract.
Ask the seller about licenses and permits so that you are aware of which ones you need. You can check your local government website to view inspection results and any health code violations against the restaurant before you buy it.
7. Marketing is Crucial
Keeping customers interested in your new restaurant is vital for success. What is the current owner doing to advertise the restaurant? Consider your marketing strategy before you buy so you can figure out how you would cater to the demographic.
Take a look at the restaurant’s social media and website before you commit to the purchase. Do they have a solid online following with plenty of positive reviews? A paper-based marketing strategy may work better if the customer base is an older crowd.
8. Buying a Restaurant is an Adventure
Buying a restaurant is hard work. However, the rewards you’ll receive along the way will make it worthwhile. Running a restaurant is the perfect way to introduce people to your recipes and culture alongside great music and delicious beverages.
Owning a restaurant will also give you more opportunities to give back to your community. You can donate surplus food to charities and homeless shelters or sponsor a worthy cause.
Get Support With Buying a Restaurant
Buying a restaurant is the perfect way to enter the business world without taking substantial financial steps. An existing restaurant with an established customer base, trained staff, and permits will allow you to take over where the previous owner left off. It would be best to research whether the restaurant for sale is a risk or a path to success.
Are you ready to buy a restaurant? Take the first step and book a free consultation with Fusion to make your dream a reality.
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Quickly Sell Your Business in St Charles County: A Complete Guide
Are you looking to sell your business in St Charles County? Whether you’re retiring, moving on to something new, or just ready for a change, selling your business is a big decision.
With over 8,647 businesses sold in the U.S. in 2021, there’s a lot of competition out there. But where do you start? How can you make sure your business stands out and sells quickly?
How do you get the best price for your hard work? And how can you be sure the transition goes smoothly? Here are a few tips to help you sell your business quickly in St Charles County:
Prepare Your Business for Sale
If you’re thinking about selling your business, there are several important things you’ll need to do to prepare. First, you’ll need to get your financials in order. This means gathering all the necessary documentation, such as income tax returns and balance sheets.
You also need to put together a sales deck or presentation that outlines your business’s key statistics, such as revenue and profitability.
You’ll also want to start thinking about what you want from the sale. What’s your ideal outcome? What are you willing to compromise on? By getting clear on your goals, you can start to formulate your negotiation strategy.
Getting all your ducks in a row will help you sell your business quickly and at a higher price.
Calculate the Value of Your Business
When you’re ready to sell your business, one of the first questions you’ll need to answer is, “how much is it worth?” Though there’s no single formula for calculating the value of a business, there are a few key factors that buyers will take into account.
One important consideration is the size of the business — larger businesses tend to sell for more than smaller ones. Another is profitability — businesses that are profitable, or have the potential for high growth, will usually command a higher price.
Finally, buyers will also look at the type of business and the industry in which it operates. Businesses in high-demand industries, such as technology or healthcare, will typically be valued higher than those in more traditional sectors.
By taking all these factors into account, you can get a better sense of what your business is worth. This helps you price it well for potential buyers.
Hire a Business Broker
Once you’ve prepared your business for sale, it’s time to start advertising it around. The best way to do this is to hire a business broker.
A business broker is a professional who will help you navigate the process of selling your business. They will help you find buyers, negotiate deals, and close the sale.
Working with St Charles business brokers is the best way to ensure that you get the best possible price for your business. They will also help you avoid common mistakes sellers make when selling their businesses in your industry.
Find the Right Buyer
When you’re ready to sell your business, it’s important to find the right buyer. The right buyer will be someone who is interested in your specific industry. They should also have the resources to make a fair offer for your business.
The right buyer should be willing to sign a non-compete agreement to protect your interests after the sale.
To find the right buyer, you can start by asking people you know in your industry if they know of anyone who might be interested in buying your business. You can also contact a business broker or an investment bank specializing in assisting with business sales.
Once you have a few potential buyers in mind, you can then begin negotiating the terms of the sale. With careful planning and preparation, you can ensure that you find the right buyer for your business and get the best possible price for your sale.
Be Honest With Potential Buyers
Honesty is always the best policy when selling your St Charles county business. It’s often tempting to try and make your business look more appealing than it really is, but this will only come back to bite you later on.
Be upfront about any potential problems or issues with the business and be prepared to answer any questions that a potential buyer may have.
If you’re not honest about the state of your business, the sale will likely fall through, and you’ll end up losing out in the end.
So, be honest with potential buyers from the start, and you’ll stand a much better chance of making a successful sale.
Know the Right Moment to Sell
Many business owners dream of the day when they can sell their company for a handsome profit. However, timing is everything.
Picking the right moment to sell can mean the difference between getting a good price and having your business languish on the market for months. If you wait too long, your company may lose value as it becomes outdated or less competitive.
On the other hand, if you sell too soon, you may miss out on important growth opportunities.
The best time to sell your business is usually when it is performing well and has potential for continued growth. If your business is struggling, you may be able to turn things around with a strategic plan and some hard work.
Pre-Qualify Buyers
It is important to pre-qualify buyers before putting your business on the market. You don’t want to waste time dealing with tire kickers or people who can’t afford to buy your business.
The best way to pre-qualify buyers is to work with a reputable business broker in St Charles County. A good broker will have a database of qualified buyers and will know how to market your business to them.
Sell Your Business in St Charles County Today
Are you ready to sell your business in St Charles County? Whether you’re looking to retire, move on to a new venture, or simply want to cash out, ensure you follow our guide above.
Contact us today if you need any help or advice when selling your business. Our team of experts would be happy to help you through the process and get you the best price for your business. Give us a call today, and let’s get started.
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Sell Your Business in St Louis With These 6 Tips
It takes between 30 and 90 days to sell a business in St. Louis. How long your business takes to sell will depend on factors like the business type, the business structure, and the location.
If you want to sell your business in St. Louis, it’s vital to know the steps to follow to ensure you find a buyer quickly. You need to keep in mind that selling your business is a process that might take some time.
Are you looking to learn more about what it will take to sell your business in St. Louis? Keep reading to learn the six steps you need to follow.
1. Determine Why You Want to Sell
The first step in selling your business is understanding why you want to sell. This knowledge will help you determine the future of your business and set a timeline for its sale.
Some business owners sell their businesses because they’re preparing to retire. Others might need to sell due to personal or health reasons. Some sell because they want to move on to something else.
Whatever your reason for selling, understanding your motivation will help you move forward with the sale. It will also make it easier to communicate your reasons to potential buyers.
2. Get Your Business Valued
The next step is to get your business valued. This will give you an idea of how much your business is worth and help you set a realistic selling price.
There are a few ways to value your business. One is to calculate the business’s net worth, which is the value of its assets minus its liabilities. Another way is to look at the business’s revenue and profit.
You can also hire a business broker to value your business. This is a good option if you’re not sure how to value your business or if you want a professional opinion.
The broker will determine the most accurate value for your business because they can access huge databases and use them for reference.
3. Prepare Your Financial Records
One of the things potential buyers will want to see is your business’s financial records. They’ll want to know things like your revenue, expenses, and profit margins.
So, before you put your business on the market, make sure you have your financial records in order. The records will give buyers confidence in your business and make the sale process smoother.
You should also have a business plan ready to show buyers. The plan will give them an idea of your business’s future and how they can grow it. If you don’t have all your financial records in order, now is the time to get them in order.
4. Find a Business Broker
You’ll sell your business faster if you rely on the expertise of business brokers. If you decide to handle the heavy lifting and ignore these professionals, there’s a high risk that your business won’t sell, or it won’t fetch a good profit.
A business broker will understand how to manage the sale process and ensure you get a higher profit. They’ll handle everything from determining your business’s value to preparing presentations for potential buyers. A broker will also bring a subjective perspective to the sale process because they’ve no emotional attachment to your business.
When choosing a broker, it’s crucial to pick someone who has experience selling businesses in your industry. This will ensure they have the knowledge and connections to help you sell your business. It’s also essential to choose a broker you’re comfortable working with.
5. Market Your Business to Find a Buyer
Once you’ve chosen a broker, it’s time to start marketing your business for sale. There are a few ways to do this.
Your broker will likely list your business on their website and other business-for-sale websites. They might also run ads in business publications and reach out to their network of buyers.
You can also market your business yourself. You can start by telling the people you know that you’re selling and running ads on your social media pages.
The key is to get the word out that your business is for sale. The more people know, the better your chances of finding a buyer.
6. Negotiate and Close the Deal
After finding a buyer, you should be prepared to negotiate a sale price. This can be a complex process, so it’s vital to have your business broker help you with the process.
Your broker will likely present the buyer’s offer to you and help you negotiate a counteroffer. They’ll also help you reach an agreement on terms such as the purchase price, payment schedule, and closing date.
Remember that you’re in control of the negotiation process. Don’t be afraid to ask for what you want and hold out for a fair price.
Once you’ve reached an agreement with the buyer, it’s time to close the deal. This is the time you’ll make a sale, and the ownership of the business will change hands.
The closing process can be complex, so it’s crucial to have an attorney help you with this. They can ensure the deal is structured correctly and that all the necessary paperwork is in order. After the deal is closed, you’ll receive the purchase price, and the buyer will officially own the business.
Sell Your Business in St. Louis Faster
Are you planning to sell your business in St. Louis? You’ll find the right buyer faster and increase your chances of success by following the above six steps.
If you’re serious about selling your business, you’ve probably searched the web for how to “sell my business” or “sell your business in St. Louis.” Look no further than Fusion Advantage. Our business brokers will help your small or medium-sized business find the best buyers in the St. Louis Area.
Contact us today to learn more about how we can help you with the selling process.
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