What methods would one employ in coming to a purchase consideration for a 50% stake (with management control) in a loss making company? ( the company (not listed) made profits until 1998 and losses thereafter) A proposed turnaround plan has been put forward showing a return to profitability in 2004.The balance sheet reflects technical insolvency with current liabilities exceeding current assets.
If one uses DCF techniques what would be the time frame one would project to and what would be the rationale behind the chosen time frame ( ie 5 years , 10 years etc)?
Would terminal values feature in calculations and how are they determined? Is it a matter of using the last net cash flow in the projection and dividing it by the cost of capital?
(ie a perpetuity)
Mark
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Different tack
If the incoming owner/manager is going to supply the turnaround expertise, then valuing on the basis of future earnings is just buying the results of your own labour.
I would start from a revalued net assets basis, and probably want to apply a discount to that.
The true test is, as pointed out, the price that a willing seller and buyer arrive at.
The simple answer
The purchase consideration is the point at which the seller is prepared to sell and the buyer is prepared to buy.
You can apply all sorts of fancy calculations ratios etc but it will come down to the above.
I'm sure if you give more precise details of the line of business and turnover etc someone will be able to give you some kind of rough guideline of what to base your offer on.
The key to formulating a starting point is an estimate of the profits expected following the purchase and then applying a multiple of year's dependant on the type of business. This should also be compared with the costs you could expect to incur in starting from scratch.
Are there unique products, premises, staff, patent, brand, location, or goodwill? These and many other factors will also come into the equation.
Hope this helps kick off some answers for you.