I AM BUYING A BUSINESS
Buying a business is one of the most consequential financial decisions you’ll ever make. Once you find a seemingly quality business that the owner is willing to seriously entertain selling (itself a difficult task), the success or failure of the purchase hinges on pricing, structuring and financing that business that is commensurate with its profitability, growth, and risk profile.
Price
Overpay for the business, and it becomes that much harder to achieve your target return on investment. For example, suppose you have a required return (hurdle rate) of 20%. If you pay $5 million for the business, you need $1 million of annual net income to generate the needed return. If you pay $10 million for the same business, you need twice that amount of net income, or $2 million annually, to generate the needed return. Whether the higher price is justified by the business’s value is a function of the certainty (or lack thereof) that the business will generate that net income consistently, which we label “risk.”
Underbid for the business, and you risk losing the opportunity altogether as the seller moves on to bidders they consider more serious contenders. This could mean throwing away months or even years of searching for a viable acquisition candidate and having to start the whole process all over again.
The power of the business valuation is that it puts you in the Goldilocks Zone - not too high and not too low.
Terms
Price and terms are dancing partners. The give and take between valuation and the terms of payment (such as earnouts, seller financing and post-sale employment contracts) often enable deals that would be impossible to achieve on price alone. You can sometimes achieve a lower purchase price by accepting terms favorable to the seller, or you can make concessions on price if you secure favorable terms in exchange. But how do you know how much to concede on price when agreeing to more seller-friendly terms? What is the impact on a $10 million nominal price if you agree to not require an earnout?
Terms complicate the purchase negotiations sharply, and it can be difficult to make sure that you aren’t accidentally paying a higher price than you had intended. The business valuation will help you negotiate the proper give-and-take so that the balance of price and terms match up with the business’s value and enable you to achieve your desired return.
Financing
If you’re planning to use funds from external sources (such as banks or private equity funds) to make your acquisition, an independent valuation of the target business may be a requirement for funding approval. At a minimum, an independent valuation of the target will enable funding decision-makers to understand the business more quickly and, therefore, make it more likely that they will supply the capital you need at acceptable terms.
A rigorous appraisal provides a highly relevant strategic analysis that will empower you to negotiate from a position of strength. By retaining High Score Strategies, you are tilting the odds of a successful transaction in your favor. Put our rigor, market data, transaction experience, speed of delivery, and independence to work for you, and gain the edge for a successful outcome.
If you’re considering or are actively participating in a business acquisition, valuation expertise can help you seize good opportunities, and manage the risks, which will result in a better deal for you. Contact us at High Score Strategies to set up a consultation.
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