25 June, 2018 / IN Business valuations / by Tony Carter
Many business owners believe that the value of their business should reflect the price achieved on sale, however this is not often the case.
Many business owners believe that the value of their business should reflect the price achieved on sale, however this is not often the case. When buying or selling a business it is important to keep this in mind:
“Price is what you pay, value is what you get” Warren Buffett.
There are several factors that can affect the price of the business.
Knowledgeable Parties – Both parties to the transaction may not have the same knowledge about the business. If the vendor of the business is not prepared to disclose sensitive information to the purchaser (i.e. customer lists, intellectual property) then the purchaser will reduce the price they are willing to pay due to the uncertainties associated with this lack of information.
Special Value – Market value does not take into account any special value attributed to the business by the purchaser. Such as occurs when the purchaser can achieve synergy benefits through cost saving by merging certain business operations.
Anxious Parties – Where the vendor is in a situation in which they are a forced to sell, the price will not reflect market value.
Current Value – Market value reflects the current value of a business and must be realised today and not some time in the future. Vendors often believe that all future potential should be incorporated in today’s value. Purchasers are not willing to pay for future growth today, especially when they bear all the risk and have to manage the business to achieve growth.
Restricted Markets – Regulatory authorities may impose requirements that restrict the number of potential purchasers through foreign ownership restrictions, competition requirements or consumer protection.
Non Financial Considerations – Market value does not take into account other non financial considerations such as the effect on price due to sales to related parties or takeovers.
Due to the above factors the price achieved for a business will either trade at a discount or premium to value. Statistics show that Australian businesses generally sell at a premium to value, with the exception of those sold in distressed sale situations.