The most comprehensive info I have found on this subject on the net. Will be back soon to follow up….

I didn’t agree with you first, but last paragraph makes sense for me…

I suggest you separate the issue of Valuation from the Deal Value question. In abstract, Valuation is what the business is worth now, on its own and as it stands, and is something that you can assess with the business owner (as we often do) at the start of any sale/investment process, and is generally done by looking at the various different valuation methods (particularly DCF) and taking a middle ground somewhere. This gives you an abstract number that we use as the ‘keep it’ value - accepting a deal below this is probably losing you money (although there may still be reasons to do so).

Deal Value, however, is what a buyer/investor is willing to pay, and hopefully a higher value. You can put a ceiling on this by looking at the business plan for the combined (or post-investment) business, and doing the same abstract valuation exercise. We call a Strategic Investor someone who has other things to bring to the table - most often an existing complimentary business to combine with yours. This will hopefully improve the value of the combination with relatively limited additional cost to the buyer/investor, although a control cost to the vendor/investee.

This why we see strategic investors almost always putting a higher value on businesses than purely financial investors.

The difference between the two is effectively the value created by the deal (after you remove the valuation of their business as a standalone). Negotiation of a deal is usually about how to split up this additional value created - and if there is no additional value created, you each need some other, strong, motivation if you’re really going to get a deal done.

But at the end of the day, valuation is an abstraction, and the deal is the only real thing - which is why we spend a lot of effort getting from one to the other.

Cheers,
Paul

In fact, valuation is what I do just about every day. I am looking forward to the blog and participating.

Have a look at my blog www.tomthemoneyman.wordpress.com for some of my other thoughts on investment, finance, economics and business.
Cheers
Tom

Your subject for the next issue is timely. I am evaluating buying an existing business whose owner said he wants to be paid $20M for it. Is it worth the price he mentioned?

After all the analysis and valuation approaches have been done, I will come up probably with a different figure and now the fun begins. Will the owner accept my offer? Will I accept his offer? Can we agree on a common price? At the end of the day, the value of the business is based on what we will agree its worth. It does not matter if the selling price is higher or lower than its real value but if the deal is not done, that figure is meaningless until a buyer agrees to buy it at that amount.

But I look forward to reading your next issue.

There is also a strategic approach which is gaining eminence now. We generally value the business in terms of what its worth to us rather than the right buyer… therein lies the holy grail…

Going through it at the moment & have the benefit of a friend who works for a guy that is in the Forbes top 250 & all he does is buy, chop up, improve & sell businesses.

I by no means have the holy grail, but what is becoming clear is that it is really about a mixture of:

1. NPV
2. Uniqueness of brand, product, design, distribution & IP (hurdles to competitors)
3. Risk
4. Tension
5. Emotion

Rull of thumb multiples are a start & there are databases available, however, rule of thumb for an FMCG business is around 10 x earnings or 1 x revenue (different by country & category). Throw in projected earnings, risk & third party tension & you get the situation of Coke paying a reported 4.1 Billion US$ for a company with revenue of of only 360 Million US$ (Glaceau Vitamin Waters). I am sure it had something to do with the 10 year NPV from projected roll out, however, I am also sure the final figure had a lot to do with “we’ll go to Pepsi” & the fact that Coke see’s it’s innovation as pretty poor lately & may be a bit emotive because they are loosing their grip on the gloabl beverage market & are no doubt under pressure to get it back.

I think, at the end of the day, you maximise your value by knowing more about who your selling to than they know about themselves, reducing risk & adding tension & emotion…but then, I haven’t quite done it yet…