Building vs. buying: Determining the value of a business can be done by comparing the cost of starting a similar business to the cost of acquisition. Starting costs may involve expenses for research and technology, sales and marketing, borrowing and finance, fixed assets, and variable costs such as employee wages.
Net asset value: The term used to calculate a company’s potential sale value is EBITDA, which is the company’s earnings before interest, tax, depreciation, and amortization, minus liabilities or financial obligations.
P/E ratio: The buyer firm’s price-earnings (P/E) ratio should be higher than that of the target firm in mergers and acquisitions to boost the acquiring company’s earnings per share (EPS).
The P/E ratio is obtained by dividing a company’s share price by its earnings per share (EPS). For instance, if a company’s share price is £20 and its earnings per share are £2, the P/E ratio is 10.
Net present value: To determine a good sale price, estimate the target company’s future cash flow, apply discount factors, and calculate the net present value.