“Price is what you pay. Value is what you get” said Warren Buffett
When you are considering buying or investing in an identified unlisted business it is important to pay the right price for the business or equity of the business. Over-paying for a business will not only reduce the expected returns on the investment but also increase the investment recovery period and financial risk of the investment. Whether you are a financial or strategic buyer, it is critical to have a strategic rationale to acquire a business. A strategic rationale will assist in assessing whether the purchase price of a business is a fair market price.
For a seller who would like to sell his/her business or equity in the business, a credible and compelling valuation must be compiled to determine the intrinsic value of the business including any value associated with expected synergy benefits in order to demand a fair price. In contrast, not knowing the intrinsic value of the business may cause the business to be sold at a price that could be far below its fair market value, resulting in a lower return of the investment as well as put the seller at a disadvantage during the negotiations. Moreover, over-charging may chase away potential buyers.
A seller is in a unique position to identify value drivers and unique factors that could boost the value of the business. Therefore, a seller must properly plan a valuation and invest substantial time and resources in valuation and diligence.
During a valuation, a seller must continue to effectively manage the business. Otherwise, value could be eroded if focus is placed only on the valuation process.
Benefits of a credible and compelling valuation
- A credible and compelling valuation assists negotiating parties to quickly close the deal.
- A credible valuation assist in deal negotiations.
- A credible valuation will stand the scrutiny of the courts.
- A credible valuation will enable parties to resolve disputes amicably and quickly.
- A credible valuation facilitates the raising of finance for the deal.
- A credible valuation helps the management to effectively manage the value drivers in order to boost the value of the business. In addition, understanding the value drivers helps the buyer to see the importance and opportunity to create value out of the deal, thereby persuading the buyer to pay a premium for the deal.
- A credible valuation will assist a buyer in determining whether he/she is over- or under paying for the deal.
- A credible valuation helps a seller to identify and quantify synergy benefits and demand a higher price for the business or equity.
- A credible valuation provides context for a financial due diligence and guides the negotiating parties towards key focus points of the due diligence.
Other uses of a valuation
A valuation may also be used for the following purposes:
- The SA Revenue Services use it for taxation purposes i.e. capital gains tax, estate duty and donations tax.
- Private equity firms use it to make investments in unlisted businesses and equities and to evaluate the performance of existing investments and exit such investments.
- Mergers and acquisitions.
- Management buyouts.
- Independent expert opinion of value.
- Financial reporting purposes.
- Setting up an employee share ownership scheme (ESOP).
- Litigation support.
- Shareholders dissolutions.
- Resolving shareholder disputes
- Marital dissolutions
Conclusion
A credible and compelling valuation is vital for a deal to succeed and can create value from the deal for both the seller and buyer. Transacting parties must use it to negotiate and close the deal speedily.
About Bethanie Management Consulting
Bethanie Management Consulting are professional accountants and trusted business and financial advisors. We use best practice to compile credible and compelling valuations. We integrate tax planning and diligence into our valuation processes. Value drivers that impact the valuation are rigorously identified and evaluated. We also analyse the generation of expected future cash flows and map these cash flows to identified integration tasks, a process that creates measurable performance indicators.
Our other services that support mergers and acquisitions transactions
- Assistance in developing acquisition strategies for acquirers.
- Assistance in developing profiles of the targets to be acquired.
- Providing assistance during negotiations.
- Structuring the deal to optimise the return on investment and reducing the deal risk.
- Financial planning and analyses for the deal.
- Conducting due diligence for buyers.
- Conducting sell-side due diligence for sellers.
- Restructuring the acquired business or developing and implementing turnaround strategies and plans if the acquired business is in distress.
- Providing post acquisition integration and implementation support.
- Raising financing for the deal.
You may download our business profile by clicking here.
Contact us
Please call us at 011 042 9768 or 072 296 1281 (Virgil). Or chat to us on WhatsApp. You can also email us at virgil@bethanieconsulting.co.za. Or you may contact us by completing our online form for a call back.
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