The productive value is determined by mathematically calculating the average net profit of the company and estimating its future value. The profits are discounted at the desired interest rate, which determines the productive value of the enterprise.
A practical method is to estimate the free cash flow from the enterprise and to calculate the highest amount of debt that could be repaid with this amount of money, including interest, during a period of, for example, five years. This provides an estimate of the sales price based on the current operations of the enterprise.
A more specific determination of the productive value would require information on the development of the market in the upcoming years as well as on how the acquired enterprise supports the buyer’s business, or how the buyer can develop the operations.
As a general rule, it is not a good idea to pay a lot for what you have to do yourself.
If you intend to acquire an enterprise, keep the following in mind:
1. Employ an expert to assess the object on sale and its value.
2. Investigate what you actually get for your money: what will be the impact on net sales when the previous entrepreneur quits (personal relationships with clients)?
3. What is the true value of the machinery and equipment?
4. Is it worthwhile to pay for the transfer of the lease on the premises?
5. What are your responsibilities regarding the employees: do you need to dismiss existing employees? Be sure to investigate the legality of any dismissals.
6. Investigate all the liabilities of the enterprise, including the tax and insurance premium liabilities.
According to studies, more than a half of the buyers of enterprises are in some way disappointed with their acquisition.
The correct purchase price is the price at which a transaction can be made. In small and medium-sized companies, the price is almost always a compromise between the expectations of the seller and the buyer. For this reason, you should use the help of an outside expert in assessing the price level.
For further information on determining the value of a company, please refer to the website of the Federation of Finnish Enterprises.