The Importance of Value Interpretation During a Sale

A cursory view of the stock market would have you believe that a company’s value is a singular metric. A stock is trading for $100 and is, therefore, worth its stock price multiplied by the number of outstanding shares. But, there is more at play than meets the eye here.

That $100 stock price is a product of hundreds of thousands of opinions, some of which have a more favorable opinion than the current price of the stock. How much more favorable? We don’t know. The same concept applies to valuing a small business during an acquisition.

Each potential acquirer of a small business has a different opinion of the company’s value. Some acquirers may be able to find strategic revenue synergies by acquiring the company. Others may choose to disband certain segments of the company to achieve cost synergies. Still others may choose to run the company exactly as it stands today.

Regardless of the exact strategy, each acquirer assigns a different value based on what the company is worth to them. It is important to recognize the different interpretations of value and act accordingly during a sale process.

For buyers, there are three specific areas you must consider: 1) Negotiations, 2) Aligning Incentives, and 3) Walking Away.

Negotiations

Asking the right questions during the sale process can help you identify where you stand in relation to other potential bidders and, in turn, substantially affect your negotiating position. An unscrupulous seller can certainly weave a web of lies to misdirect you, but he or she usually has a difficult time keeping up the charade over time. Multiple meetings and direct questions will help you identify your place in the pecking order of bidders.

Understanding the number of bidders, not just your rank among them, is important as well. Typically, discussions will focus on the buyer and the seller, but a prudent CFO will make sure to understand the value being derived by all parties involved, not just the two at the table.

Aligning Incentives

As Mike Volpi points out in this article, it is important to “align the incentives of both parties.” For example, he suggests incorporating stock instead of cash in the purchase price. It is crucial to note here that value propositions and incentives may not even be monetary! As a potential acquiree, the owner/founder of the small business may be considering whether his role at the combined entity will still exist.

At the other end of the spectrum, sellers may be wondering whether the combined entity offers them a newly found platform to express their grand ideas. “Will my ideas be squashed or nurtured at the parent company?” These may be non-monetary considerations, but one would be unwise to disregard them when considering value.

Walking Away

The farther you get into the negotiation phase, the more likely it is that you will need to reveal private information about your own company to the seller, especially in the circumstances described above if company stock is used to fund the acquisition. Understanding the fact that your value does not align with the seller or the multitude of other interested parties allows you to walk away from the deal without scars and without revealing potentially damaging information to a competitor.

Whether you’re looking to acquire a business or looking to be acquired, understanding another business’ interpretation of value is vital to a successful acquisition. However, positioning your business for an optimal sale or purchase can be challenging.

In addition to its finance, HR, technology and CFO services, vcfo assists in the development of acquisition strategies for both buyers and sellers, as well as providing services to oversee the transition of people and processes.