The art of valuation
When it comes to valuation, there are dozens of techniques available to scrutinize every aspect of a company’s historical financial performance. But even the most detailed analysis only yields a range of potential values—values driven by a host of assumptions.
In other words, no matter how impressive a company has been to date, getting one’s company valued at the higher end of the range depends more on the “art” of convincing one or more buyers that the company has more future potential than its past reflects.
The value of experts
Bringing together a select group of attentive and eager buyers is the trademark of a superior mergers and acquisitions (M&A) advisor.
The advisor and the team of bankers should be experts in their respective industries, each with the ability to bring together a diverse universe of buyers. The best potential buyers are ones who fit the goals and personality of the target company and would be willing to pay a premium if they saw real value.
The purpose of this highly focused process is to replace the commodity-driven price-value adage that “something is worth what someone else will pay” with a more proactive approach that “something is worth what the most informed buyer believes it could be worth.” To wit, Benjamin Graham, the father of company valuations, cautioned against impetuous bargain hunters: “Price is what you pay; value is what you get.”
The science of valuation
To be clear, there’s no art without the science, and it’s imperative for a company to have all of its financials (both historical and forecast) in pristine condition before the process begins. Even the smallest error can cause buyers to wonder what else might be wrong.
Because of this potential, an M&A professional should invest a tremendous amount of presale effort in not only ensuring that a company’s financials correctly tie, but also in looking for anomalous financial events that could distract from a proper valuation.
The emotion of a sale
There’s a tremendous amount of emotion involved in the sale of a private company—especially if it’s a family-run business. It’s common for this sentiment to distract sellers from achieving the most important goal of extracting the highest possible value for their life’s work. Recognizing this helps sellers further appreciate the value of an expert team. In these cases, it's often beneficial to have a financial and business transition plan in place, which can show the seller and their family that their personal and/or business legacy goals can be achieved to provide a greater level of comfort.
The bottom line
By using the expertise of those who can correctly position a company to a multitude of different buyer types, the private entrepreneur can take comfort in knowing his or her company will be shown to those who know both the price and value of the enterprise.
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