Starting a business is known to be a challenging task for any entrepreneur. However, transferring one's own business after years of careful building and achieving significant growth is equally challenging.
Determining value and final price alone can lead to headaches. Is there such a thing as a fixed value or a regulated price?
Through thorough analysis, substantiation and calculation, the value of a business is determined. Nevertheless, the price actually paid in a sale, for example, may be higher or lower than this value. The final price paid by the buyer for the business is the result of negotiations between the seller and the buyer, which in this article are expressed as an enterprise value and created value.
Valuing a business
Valuing a business can be done in several ways. A valuation method should be chosen that fits the case and the nature and complexity of the business.
A widely used and widely known method is the discounted cash flow ( DCF) method. As the name suggests, future expected cash flows are discounted to present value. The discount rate used is a number constructed from several factors, including the risk-free premium and the market risk premium. These risk premiums are related to the "opportunity cost" of capital.
The DCF method falls within the earnings/income approach. Here, all (potential) costs and revenues are projected for a specific period, and then converted to an expected future free cash flow. This cash flow is then discounted to the current enterprise value.
Ultimate price of company
In addition to the valuation method chosen, it is essential to consider the perspective of the user of the valuation. The same business can have significantly varying value outcomes depending on who is using the valuation.
For example, from the perspective of a strategic buyer, a business can usually be worth more than from the perspective of management in a management buyout (MBO) situation. This is because a strategic buyer may gain synergy benefits from the same business, such as cost savings or strengthening current business operations. Negotiations between seller and buyer often arise from differences in perspective about the business and its future.
Several factors can lead to discussions between the seller and buyer regarding the value of the business. It is important to understand these aspects thoroughly, as they can have a significant impact on the final valuation of the business.
Calculation example of value and selling price
This hypothetical situation looks at a solar panel installer. After applying the DCF method, de ondernemingswaarde, called the stand-alone value, turns out to be €1.7 million.
After identifying a strategic buyer and conducting negotiations, an agreed sales price of €2.5 million was established. The additional €800,000 on top of de ondernemingswaarde is referred to as the value created for the seller. This represents part of the synergy benefits that the strategic buyer will experience from merging the businesses.
Examples of synergy benefits include better bargaining power in the marketplace and cost savings from merging certain business units into a larger entity. Of course, a buyer will not be willing to pay up front for all these self-created synergy benefits, however, a buyer is often willing to share them with the seller. This is mainly due to a lack of alternatives for the buyer to create the same synergy benefits.
Conclusion
In practice, entrepreneurs often assume that the final price a buyer is willing to pay corresponds to the stand-alone company value. Therefore, when determining the ideal acquisition party, it is important to identify and discuss these synergy benefits with a potential buyer in order to maximize the transaction price.
