Jul 18 2011
For years, valuation experts have been appraising businesses large and small, in one of three ways: Book Value, Discounted Cash Flow Analysis, and or Fair Market Value. A Fair Market Value analysis is based on comparables of other like companies.
These methods, although statistically valid, provide a wide range of value that is often not prophetic. Peak’s experience has found there is a host of “other factors” that are not present on a company’s balance sheet, profit and loss statement or cash flow analysis. The true value to place on these “other factors” is often difficult to predict until the company is tested in the market place.
“Other Factors” that can alter pre-determined traditional valuations include:
Sale Trends. A company that increases revenues and profitability (in margins and in dollars) for recent, consecutive years will receive a premium over a company of the same size with declining sales.
Goodwill. A company held in high esteem by suppliers and customers will command a higher price than one with a questionable reputation.
Customer Diversification. A large discount will be placed on a company that relies on one or two large customers for the majority of their business. A broad customer base lowers the risk profile.
Barrier to Entry. A company that has a unique solution that is difficult for others to replicate, offers far more value to a buyer than one that competes against a multitude of companies with identical products or services.
Infrastructure Strength. A stable and capable management team is also a factor that will increase a buyer’s price.
Existence of synergy. Most importantly synergistic buyers will pay more because they expect to get higher returns as a result of eliminating duplicate cost.
Although getting a valuation for a company can have a purpose and give a seller a range of value, it is Peak’s Viewpoint that a Seller will maximize value when it markets the company leveraging “Other Factors” that can make the merger of two companies result in a 1+1= 3 scenario.