Selling shareholders hope to receive an estimate of the proceeds that can be achieved in a transaction. In any case, the advisors involved obtain the contact details of potential sellers.
But how useful are the results of “company value calculators”, regardless of whether they are validated and commented on by human employees?
Let’s reflect upon some of the arguments for and against company value calculators.
Price differs from value
These few comments already indicate that value and purchase price may differ considerably.
At the same time, it can be assumed that this sometimes subtle and sometimes gross difference between value and price is taken into account when the respective consultants comment upon the results of business value calculators. After all, this is a purely financial issue.
Competition amongst buyers
Which can happen. However, it is just as likely that a number of buyers “play poker” and deliberately submit lower offers than market value.
Accordingly, one should expect positive competition between buyers as well as “negative competition” and not necessarily rely on Apple and Alphabet or Deutsche Post and Kühne und Nagel vying for the contract.
This is meant as an initial indication that the dynamics of the sales process – and thus a relatively difficult factor to assess – can have a significant impact on achievable company values and prices.
All the more important to never approach buyers before preparing the case, arguments and financials more than thoroughly.
Synergy Potential
Synergies can be imagined as interlocking cogwheels. Not all gears interlock equally well.
Synergies determine whether a company becomes a serious buyer candidate in the first place. And also how strong the buyer’s interest is.
Which is of course the most decisive criterion for the purchase price.
Synergies therefore always come into play in purchase price negotiations. The exact reasons for the intended transaction do not have to be spelled out in detail. One would like to believe that, on the contrary, the buyer has a tactical interest in keeping the exact motives to himself. At the same time, the takeover of innovative companies in particular is regularly a risky step for established market players. This is because integration is likely to be a challenge. For this reason, the buyer will want to gather abundant information during the preliminary talks and due diligence. This means that potential synergies are often discussed very transparently, sometimes passionately, in anticipation of the future partnership.
However, the concrete value of synergies lies in an increase in sales or a reduction in costs on the part of the buyer. As a seller, you will have little insight into these value potentials without very precise knowledge of the seller’s business management and its value chains.
And thus just as little in the buyer’s bargaining range.
You are a shareholder of a medium-sized company or start-up and would like to get a second opinion on your transaction project?
Type, Size and Strategic Motives of the Buyer
On the one hand, the largest buyers in the market receive the most offers and can afford to be choosy. Secondly, the pressure on an already dominant player to buy an SME or a well-developing start-up is probably not overwhelming.
On the other hand, a buyer must of course have a certain amount of substance in order to take over meaningfully large companies, be it with their own or with borrowed capital.
So there is also an optimum size for potential buyers. Thinking about gremia and decision making processes, it becomes obvious that these will have an impact on every aspect of the transaction.
Different types of buyers, here meaning strategic vs. financial investors, also prefer different transaction structures, the impact of which on the actual purchase price paid out, which is ultimately what matters, can be very significant.
Transaction Structure
Transaction structures are essentially all about how much cash is paid out at the time of the transaction, what other considerations the buyer provides, when these are provided and upon which conditions.
In spite of the flexibility claimed financial investors have recently been giving preference – to reverse participations. Under this model, the seller contributes a significant portion of the transaction proceeds to the company that buys the company in question.
Only through the sale of this new holding company, which of course aims to achieve a significant increase in value, will the capital contributed and locked become liquid again.
Other transaction related circumstances
The extent to which the company is integrated into a larger structure can also influence both sales and costs. This, in turn, can become a decisive factor for the achievability of any earn-out targets.
Each of the circumstances mentioned can completely relativize the expected purchase price – or raise it to a completely different level. It therefore makes sense to discuss company values and the purchase prices derived from them, especially for shareholders who do not yet have any transaction experience, in anticipation of the process and negotiations to come. Nevertheless, it is advisable to remain attentive and focused over the entire course of the transaction to not run into surprises, or grasp when a big opportunity may arise.
