The Instituut voor Zakelijke Mediation deals with buy-in and buy-out of shareholders, partners, associates, mates and partners. This can be in a conflict situation (business mediation), in a transfer situation (family or management buyout mediation) or in a negotiation (party counseling).
In all these cases, we are dealing with a valuation and setting a final purchase price for the property. But what is the difference between value and price?
- A valuation is a subjective calculation of the company's economic value based on forecasts, investments, market and environmental analyses and risk assessments.
- Price is the result of (business) negotiations between a buyer and a seller in the context of transfer of property.
With valuation, you are looking at the future of the company. Buyer and seller can have very different views in this regard. Sellers emphasize the opportunities, buyers emphasize the risks. This is normal and does not have to be a problem. If the two visions diverge and there is no overlap, there can be no price either. The area in which a price can be made is called: Zone of Potential Agreement (ZOPA).
Premiums and discounts
Apart from the regular valuation differences, there are also price-increasing and -pressing factors that have a huge effect on the purchase price. In fact, pricing has to do with the question: who is the overriding party here, who is strong and who can influence the price here?
What are these premiums and discounts that play a role in price formation (in case of a B.V. or N.V.):
- Control premium (control premium): the majority shareholder has the upper hand in regular voting relationships. This means that the majority shareholder exercises control over the company's cash flows. Therefore, the shares that give someone the majority position are worth a premium.
- Minority discount: conversely, a minority shareholder is unable to enforce decisions. This makes the minority shareholder's position less attractive and also less easy to sell.
- Synergy premium: a buyer may see the benefits of combining two businesses: combining products, combining departments and office space, and saving duplicate costs. These synergy benefits can increase the price beyond the valuation.
- Family or MBO discount: sometimes as a buyer you have little choice in who you can and want to sell the business to. Family businesses especially want the family to remain involved in future generations. A child or grandchild who continues the company usually gets a discounted price. A management buyout team can also expect discounts on the price because they themselves contributed to the current value as management. These discounts can be as much as 40% of the valuation.
- Strategic premium: neighbor's land is only for sale once. The buyer experiences this possible acquisition as an outside opportunity. The buyer sees opportunities to gain an important position in the competitive arena. Above valuation and synergy benefits, a premium is paid that is no longer financially justifiable.
- Liquidity discount: the reverse is also true. For some businesses there is simply no interest: not from the family, not from the management and not from the competition. Shares of a B.V. are not publicly tradable, therefore not liquid. The seller will have to fall far below the valuation to find someone in the market willing to make another offer at this price.
Simply put: in pricing, you can end up (far) above or below the valuation, depending on how attractive your business and within it your position as a minority or majority shareholder is.
