In response to last week’s excerpt of an Inc. online article, which essentially said that business valuations were not worth “the money or the hassle” for an owner who is considering a sale, we received the following insightful responses:
- “It is, of course, true that the price at which a company is sold is ultimately determined in the marketplace, and not by any formal appraisal derived value,” says Art Rosenbloom (Charles River Associates). “Some buyers will pay above theoretical fair market value if they need a company badly enough. Or, as one of my buy-side clients used to say, ‘Your price, my terms.’ Thus, the rigidity or looseness of the seller’s representations and warranties, the terms of escrows and seller indemnifications, and other non-valuation determinants inevitably play a part in determining the price of the ultimate transaction. There’s simply no way that these can be taken into consideration in an a priori valuation.
“That said, the article fails to mention that the classic valuation theories going into an appraisal are likewise used by parties and their advisors in real-life deals. Comparative company, comparative transactions, and DCF approaches are integral to forming initial ranges of value for the seller, above, below, or within which the deal will ultimately trade.”
- “There doesn’t appear to be anything in the article that is actually inaccurate,” says Michael Molder (Marcum). “A valuation attempts to ascertain the equilibrium price between hypothetical parties acting on general assessments of the economic circumstances at a particular point in time. Economic circumstances change, company performance changes, investment alternatives change, and all of these make the results of a valuation non-representative at some other point in time.
“There are any number of situations which mandate a formal valuation; selling a business outright isn’t one of them. A business owner looking to sell his/her business needs consultation. Many sales transactions, like the one described in the article, involve synergistic benefits that are not captured in the hypothetical world of fair market value. These transactions are more like a chess game—assessing the prospective buyer’s potential synergies and resources against the seller’s need to do the deal. Even if counsel or accountants suggest getting a valuation, it is up to the valuation professional to recognize that a formal conclusion of value and report is not what this particular client needs, and to offer the service that is actually needed: consultation. If that isn’t part of our ethical standards, it certainly should be.”
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