Each buyer will have a differing view of what the acquisition target is worth to them. Each buyer will have a different emotional threshold as to how badly they want to own the acquisition target. Value Tip: The key to extracting the highest price on the sale of your business is to find the buyer who can afford to and will pay the highest price for the business, in a competitive sale situation.
Transaction Price = Intrinsic Value + Premium Value specific to a buyer (if any)
Intrinsic value represents the underlying economic value of the business on an as-is-where-is basis to a financial buyer. It represents the underlying value of the cash flows to a buyer who will continue the business in its existing state and is unable to generate additional cash flow from it or from a related investment.
Economic premiums
Synergistic premiums are paid sometimes by buyers of businesses for valid economic reasons:
Synergistic premiums are paid when the buyer is prepared to share some of the potential synergies with the seller. Synergies are paid for net of the costs of obtaining the synergies, such as systems integration and termination costs (people, leases).
The likelihood and quantum of a synergistic premium being paid increases when:
Areas where the seller can influence the extent of the synergistic premium paid, include:
Synergies are easy to guesstimate but very hard to bank. Value Tip: Do not under-estimate the time and cost involved to bank synergies. In many cases achieving synergies will require significant changes to both the buyer's and seller's ways of doing business and we all know how difficult change is to implement.
Non Economic premiums
Premiums can be paid for other less than economic reasons:
Obviously, for valid economic reasons synergistic buyers can and will pay more for a business than an intrinsic buyer, who buys based on the standalone merits of the business. Therefore when considering an exit from the business, the seller should consider who is the most likely buyer and will that buyer be a synergistic buyer.
The key then is getting the identified most likely buyer to transact.
Value tip: As Warren Buffet says: " the search for acquisitions is one continuous baseball game – there will be many pitches, just wait for the right one before you swing."
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