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Succession Planning | M&A Activity | Latest News

The price is right!

Over hundreds of deals, I’ve witnessed countless, often intense negotiations around price. It’s clearly a critical factor that, along with deal terms and fit, determines the success of any deal. So, it’s quite right to focus on the price paid and entirely understandable, for both sides to spend significant time making sure the price is right.

As with any major financial transaction, the final price paid is frequently quite different from the original price. Initial marketing, negotiations, due diligence, legal negotiations, these phases bring different professionals into play and they bring their own perspective, which in turn works to change the buying and selling parties perspectives.

At Vertus, we focus on like-minded deals between two parties who are negotiating in an open and fair manner, with their respective client’s best interests at heart. Despite the intent, price negotiations can still be challenging, and this is frequently down to price anchoring, where a number is mentioned (frequently at the start of the process) and one or both parties become attached (or anchored) to that number.

There are a few ways to address this issue. For a start, ignoring what one reads in the financial press is a good idea. Commentators frequently look to simplify their stories, by using shorthand to make the subject easier to understand. Anyone who has actually been involved in buying or selling businesses, knows that the news article rarely provides an accurate reflection of reality.

Understanding the difference between a valuation and an offer is also very important. A valuation is a technical exercise that often produces a range of possible values. This range is a starting point. It is not definitive. An offer on the other hand, is a price to be paid, typically over a period of time (terms) and with a number of factors attaching. The offer should be the focus of negotiations, not the valuation.

Timing is also very important. An offer cannot be made until the buyer has discovered some critical information about the sellers business. Discussing numbers at the start of the process is risky, as it can lead to a fixation of that number, which may well become a different number, once some basic discovery has taken place.

Maybe the best approach is for seller and buyer to discuss valuation methodologies, agree that a range will exist and that any offer, will sit within that range and be subject to the terms (amount paid upfront, period of deferred payment, conditions and so on). Then discover more about each other’s business, determine whether there is a good fit, then get down to terms and agree on an offer. In our experience, this process seems to remove much of the stress around price negotiations and leads to a higher chance of a deal completing.

 

Valuations briefing note

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