Sale time jitters
Thursday, August 16, 2007/
Private businesses are immune from sharemarket gyrations, but they get a taste of fluctuating value when it comes time to sell.
The paper value of some of the world’s largest companies has changed by the hour in the past few weeks. Some of this is the result of changes to key values in analyst financial models; much of it is fear and speculation. For the most part private businesses avoid this roller coaster. This is because a public company is for sale every day; a private company sale happens more rarely.
When a private company is for sale, instead of market jitters you get price negotiations. On a given day these can be even more volatile than any sharemarket. The seller assesses the business, its assets and earning potential, and perhaps its emotional value, and puts a figure on its value. The potential buyer looks at how the business fits with their future plans, assesses the business, its assets and earnings potential, factors in risk and change and arrives at a value. The negotiations are all about getting these two values to be the same.
Too often the negotiations are sidetracked by discussions of future plans; the seller’s emotional value and the buyer’s change assessment are never compatible. So it is essential for these to be left off the table. This is much easier to do if the sale is a straight purchase, almost impossible to do if it involves a work-out or future earnings clause. The buyer essentially needs to decide what is more valuable to them – the continuity a work-out clause provides, or the implementation of their change program. It cannot be both.
Working on a straight cash sale, the negotiations will proceed much more easily if the parameters around the valuation are agreed. For example, agree the multiple of earnings and then discuss the detail of the earnings calculation, rather than haggle over a stated number. Alternatively, agree on the assets included, and then discuss the valuation of assets, perhaps get independent advice and valuations. An example of this is many retailers sell with stock at valuation (SAV). This has some practical merit as the stock value is constantly changing. However, it also has some potential for disagreement if the retailer is overstocked or carrying some stock that is inappropriate or difficult to sell.
Also try and set some parameters for the decision: it is in everyone’s interest for the negotiations to be short and sharp. However, a business can be a complicated beast, so to this end once some broad parameters are agreed it is a good idea to specify a period of exclusive negotiation in which all of the due diligence is done, the outcome of which will determine the sale parameters and hopefully seal the deal.
If you are a buyer in the midst of a negotiation and your valuation of the business is going up and down, keep it to yourself. Pricing jitters can upset the vendor and even if at the end of the day you are prepared to pay the price, your earlier comments may have cost you the goodwill for which you have just paid extra.
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