Part 7: Understanding price implications of people when buying or selling
This is Part 7 of a multipart blog series on negotiating the price of a small business. If you missed the previous post, read about understanding price implications of financial metrics here.
Moving from the relatively clear and quantifiable financial factors explored in Part 6, we switch back to more messy qualitative factors, tackling perhaps the biggest value-driver in any small business: people. Talent can make or break any business, so, perhaps unsurprisingly, shareholder and management team dynamics almost always feature in negotiations to buy or sell a small business. The factors that most commonly create price pressure are:
Part 6: Understanding price implications of financial metrics
This is Part 6 of a multipart blog series on negotiating the price of a small business. If you missed the previous post, read about understanding the price implications of industry fundamentals here.
When it comes to valuing a small business, now is where things get a little more real, and more quantifiable. Indeed, the business model characteristics and industry factors discussed in Part 4 and Part 5, respectively, are primarily qualitative in nature and may go undiscussed altogether when it comes to buying or selling a small business.
Part 5: Understanding price implications of industry fundamentals
This is Part 5 of a multipart blog series on negotiating the price of a small business. If you missed the previous posts, click here.
Beyond the characteristics of the target company’s business model, there are certain “macro” industry fundamentals that small business buyers like to see. The presence (or absence) of these characteristics may influence negotiations and put pressure on price when it comes to buying or selling a small business.
Part 4: Understanding price implications of business model design
This is Part 4 of a multipart blog series on negotiating the price of a small business. If you missed the previous posts, click here.
Regardless of the control dynamics we discussed in Part 3, there are certain fundamental business model characteristics that buyers of small businesses tend to like, so they’ll be willing to pay a premium for them, relative to other comparable companies.
We chatted to a recent user of EquityMaven to find out about their experience of our business valuation product. Here’s what they had to say.
Tell us who you are.
I’m Dorian Cabral, from IT Anywhere.
Part 3: Understanding price implications of deal structure
This is Part 3 of a multipart blog series on negotiating the price of a small private company. If you missed the previous post, click here.
As the expression goes, “there are many ways to skin a cat”. Nothing could be truer in deal structuring: there are innumerable ways to achieve desired outcomes, share risks and create the right incentives. That said, it’s impossible to “structure around” the most critical issue in any deal: control.
Part 2: Understanding key value drivers
This is Part 2 of a multipart blog series on negotiating the price of a small private company. If you missed the previous post, click here.
Even if the small business valuation work discussed in Part 1 leaves a buyer and seller with similar independent estimations of value, and they overlap enough to allow for an actual transaction (in negotiation, this overlap is called a zone of possible agreement, or ZOPA), each party still has an incentive to widen the gap between the perceived value and actual price.
Part 1: Agreeing on valuation techniques, assumptions and inputs
As discussed in our Value versus Price post, conducting a business valuation doesn’t necessarily yield the final price a company or asset is bought or sold for. Far from it – a valuation is usually just the starting point for a more involved (and subjective) price negotiation.
Why are they almost never the same?
In business valuation, it’s important to distinguish between price and value because – while sometimes they’re seen as the same – in practice, they’re often quite different. This dynamic is especially true in valuing small private companies, where data is typically incomplete and opaque, and markets are illiquid and rife with information discrepancies.
When we were developing EquityMaven back in 2018-19, we thought it was an interesting time in the world’s economy. Why? Well, the wealthiest generation in American history needed to pass down its riches (around $68 trillion to be precise*) – which is rather a lot of money to move around. Many Baby Boomers (those born between 1946 and 1964) were reaching either the end of their working careers – or the end of their lives.
How do you go about getting the true and fair market value of a business? Whether you’re buying or selling (or investing, insuring or advising!), valuing a company can be a complex and lengthy process, so here’s a more detailed explanation of how it all works.
When it comes to valuing a business, there are several methodologies you could use. Each methodology is different, with distinct advantages and disadvantages that may make them more suited to certain scenarios.
You may recall from our valuation methodology or time value of money blog posts that our primary valuation technique – the Discounted Cash Flow (DCF) method – relies on a Discount Rate. Although there are good reasons to use (or at least test!) other rates, the appropriate Discount Rate to use for a DCF is often the company’s weighted average cost of capital or “WACC”.
Valuing young companies is a difficult task. Because a new company is early on in its lifecycle, it can be hard to project what it will be worth in future – especially when it has no established products or services yet. So, how do you go about valuing it accurately?
When it comes to valuing a company, it’s crucial to understand the difference between equity value and enterprise value. At their simplest, the two concepts can be defined as follows:
Similarly sized and spec’d houses in the same neighbourhood should have similar asking prices, should they not? The multiples approach is a theory of valuation based on this same concept: that similar assets sell at similar prices. It assumes that a ratio comparing value to a firm-specific variable, like operating margins or cash flow, is the same across similar firms.