Discounted Cash Flows
This method effectively values a business on the future cash flows that a business
will generate. A key assumption here is that the inherent value of a business is the
sum of the future free cash flow, plus the terminal value, if any, expressed in present
value terms. Arguably, this method is more technically pure. It does however rely on
the availability of reliable information on the past and future cash flows of the
business. This is its inherent weakness when applied to a closely held SME in the
private sector in Australia. While it is possible to identify and construct cash flow
history, the nature of many privately held SME’s means that it is difficult to predict
with a high degree of certainty future cash flows. This valuation methodology would
only be applicable for a very mature business where there was a clear and
sustainable history of cash flows, a stable and non reliant management team and
reasonable certainty (possibly in the form of binding legal contracts or legislative
surety) in respect of future cash flow projections.
Net Tangible Assets
As the term indicates, this methodology simply takes into account the net value of a
business’s net tangible assets. This methodology is applicable where a business is
generating losses, and accordingly trying to achieve the best price for the stock, plant
and equipment and other assets of the business. By nature the use of this method
assumes that there is no value in the intangible assets of the business and that no
significant goodwill exists. A variant of this method is to assess the value of the
tangible assets and then apply a premium calculated with regard to the established
business infrastructure and client base value.
This methodology may be appropriate for asset rich businesses. Some businesses
exist where the inherent value of the assets is greater than the value of the business
as a going concern. In such cases it is necessary to decide whether it is appropriate
©AVANTIA 2007
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19