Last month I was speaking with the Head of M&A at a US company with turnover of $1.3Bn+. I had approached them as part of our sales process and right from the start (before even getting an NDA signed) I was being asked what the company’s valuation range was and the valuation methodologies used.
Alarm bells started to ring and if you’ve already read our guidebook - “The eight essential principles to getting the best price” you will know why. For those of you who haven’t, we would always advise that you never give a price (or range) for the business - instead, you should let the market decide through a robust competitive process. Additionally, all inputs used in the valuation methodologies can be argued downward by a knowledgeable corporate financier / investment banker. Had we been unaware of their tactics - we would have experienced a price chip before this potential buyer had even reviewed the company’s details!
We have recently published a new guidebook called, "The Basics of Business Valuation: What Matters and Why", you may be asking - if we advise our clients to let the market decide value – why have we written this book? Well, we wanted to explain how buyers will approach the valuation process - and those who are forewarned are forearmed.
The guidebook covers a basic discussion about what value means and the mechanics of classic valuation approaches typically used (with minor variation) by a variety of market participants.
As you will see company valuation is as much art as science and when buyer synergies are considered, and emotion introduced – a valuation range can vary significantly between buyers.
For a seller, a desktop business valuation is not very good at identifying the highest possible price that the marketplace is willing to pay. This is because it is almost impossible to know all the assumptions, potential synergies and motivations of each and every single potential acquirer in the marketplace and is why at INSIGHT we believe it is imperative that a robust competitive process is run on behalf of the seller to ensure that the best price and terms are found.
If you are considering a company sale, we would encourage you to read this free short guidebook here.
Comments