Monday, January 16, 2012

Value vs. Price

It’s reasonable to assert that in most areas of life the end product is generally a reflection of the means to that end. This holds true in the acquisition and divestiture of private companies.

A well-planned methodical approach to the purchase or sale of a business will commence with an intrinsic-oriented identification of the fair value of a commercial enterprise. This applies to most small businesses and all mid cap and large-cap multinational corporations. That is, the value of a business as a singular investment among the supply of all types of investments carrying varying risk in an economy must be understood according to its demonstrated ability to generate consistent rates of return on invested capital in comparison to other assets or investment. Understanding the particular asset or company in this investment context is critical to the viability of the outcome of the purchase or the sale.

Defensible valuation analysis that considers the nature of the operating parameters of the business, risks to cash flows and the particular market dynamic applicable to the industry sector, provides a platform for pricing the Company. The proper identification of rates of return is essentially a gateway to the identification of value.

While the price a company ultimately fetches in the open market will reflect a properly identified range of value, other factors including the supply/demand curve for the business, the existing capacity to finance the purchase and the evolving tax implications will influence price and the structure of a transaction.

Accurate identification of the range of value will support pricing in negotiation as the Company comes under increasing scrutiny by a purchaser. On the other hand, the vendor can point to the economic “hot points” demonstrated by the business with a view to asserting the price position identified.

A clear and concise concept of value should provide the means to an effective and efficient result for both purchaser and vendor. It is therefore imperative owners looking to divest their share interests in their private companies retain transaction advisors who undertake to understand the detailed inner workings of the company and its true economic capacities to enable a high probability for an optimal outcome.

Ronald Kavanaugh CBV
Member of the Canadian Institute of Chartered Business Valuators