A discounted crab flow valuation

IMAGINE a crab restaurant chain is up for sale. The salesman tells you that the chain earned roughly S$110 million last year and S$100 million the year before. After deducting all costs and taxes, the chain made S$14 million for its owners last year and S$10 million the year before.

So how much does this restaurant chain cost, you ask? "Just S$160 million, special price, confirmed will go up because so few shares are on offer to the public," comes the reply.

What do you do? Especially if you don't trust the salesman's words. The price might come down too.

If you come up with an independent value of the business and it is S$200 million, then S$160 million might be an okay price to pay. But if you think the business is worth only S$100 million, then you don't want to …