Business leaders who have a strong appetite for growth will occasionally face critical transactions opportunities such as acquiring a complementary business arm or selling part or all of their own establishment to further their business goals. These critical business engagements are a balancing act, and business owners may need a little guidance from professional valuation consultants in order to find the perfect balance.
Before we delve into the different transactions where consulting would help find that balance, let’s begin by examining the two different types of business values that professionals can calculate.
Aiming for a Point vs. a Range
Valuation professionals can calculate a value based on a point of basis or a range of basis. Think of the point of basis in terms of archery—the purpose of the game is to hit the center of a target, a single point.
An exact value is preferred when a client would like to hone in on a single price point. Professionals typically provide point values for financial reporting such as annual reports, quarterly reports, and proxy materials that outline how investors should react in special circumstances.
A range of basis can be thought of more as a shotgun because while it is aiming for the same target, the range of impact may cover a large or small area. In valuation consulting, creating a range of values provides a framework for negotiation.
Valuation professionals aim for a the smallest and most accurate range of values possible using standard deviation (remember this from math class all those years ago?). As a refresher, standard deviation measures the distribution of a dataset relative to the average value, giving you that base range to work from.
Say you’re looking into buying the donut shop down the street that swallows half your paycheck with your daily visit. You’re told it’s worth around $4,000,000, but how do you know what it’s really worth? Having a range of values calculated by professionals gives you a leg up when negotiating the price. As tempting as those little treats may be, you don’t want to make an offer on the high end (especially when you already spend enough money shopping there) if you can find a more reasonable price on the spectrum. A range lets you see the full spectrum of values and allows you to make the best offer for both parties.
Testing Your Aim
So why would you need to consult with a valuation firm? Valuation consulting is a win-win situation, and below are examples of how consultations can be beneficial in such cases as when dealing with buying or selling a business, mergers, primary transactions, secondary transactions, and term sheets.
Let’s dive in.
Buying or Selling
If you’re looking into buying or selling a business, it’s probably a good idea to consult with an independent valuation firm to inform and support your offer or to analyze and advise on an offer you have received.
Those who haven’t consulted with a valuation firm will likely be unprepared and have unrealistic expectations of the value of a business.
On the other hand, those who have done their homework and consulted with a valuation firm are well-informed and prepared to make and defend a reasonable offer. In that respect, valuation consultants act as a wingmen when negotiating business transactions.
If you want to have the liberty to negotiate the best price possible, consulting with a valuation firm gives you the knowledge and subsequent opportunity for you to approach the situation with an accurate target value in mind.
Another situation can emerge when your ideal partner company extends a proposal and has opened an opportunity for both of you join and become stronger. Why should you consult with a valuation firm when you have decided to merge with another company? When two companies merge, they exchange shares and may also swap financial instruments or stock. A valuation will tell you the intrinsic value of those exchanges so you can get the most accurate value and make the merger as seamless as possible.
How about transactions such as primary and secondary? What role does valuation play when business owners are creating securities in primary markets or when securities are being traded by investors in secondary markets?
If you’re a business owner of a private company and you are going public, chances are you want to know the value of your shares before you put them on the market so you get the best bang for your buck. A valuation firm can help you do that.
What if your company is in an earlier stage and you want to keep constructing your empire? Raising capital requires investors who are thirsty for promising opportunities, and those investors are not going to bet their money on an archer with a flimsy bow string. They want to understand the value of a company and pour their efforts into an athlete who has a real shot at the gold. Valuation consulting can prove a company holds potential for the gold.
What if you want to purchase a company using stock? Don’t you want to first know how much your stock is worth before window shopping? Knowing the worth of your stock gives you an idea of your potential as a prospective buyer. It also benefits those who want to sell shares in the stock market. Professionals at a valuation firm can value your stock, giving you an accurate value before you depart on your shopping trip.
Moving onto another situation: term sheets. Term sheets are beneficial because they unveil surprises by outlining the terms and conditions of an investment. Valuation consulting can lend clarity when business owners and investors are stepping into a transaction because valuation professionals analyze the terms and conditions. They provide clients with all the information needed to make a decision, helping business owners determine if they should tie the knot or cut the cord.
Consulting with a valuation firm adds tremendous support and transparency when decision-makers face challenging transactions. Valuation professionals can provide data and opinions, like fairness and solvency opinions, that make the decision-making process more efficient and empower business leaders to excel in their fiduciary duties.
Trusted data is your ammunition, and the better the quality, the more likely you are to hit your target. Highly-skilled professionals understand how to calculate that trusted data and tailor the various methodologies available to assist in the success of each client’s endeavors.
At Scalar, we have a multi-tiered review process that allows multiple professionals to oversee each case, resolve any concerns, and secure an accurate valuation. We understand each client is different, and we have experience working with business owners of varying company sizes and industries. Our professionals engage clients in every stage of the valuation process, and not only provide clients with trustworthy data, but also with advice to help them thrive in the future.
If you need valuation services, you can request a complimentary consultation or call us at 385.831.1010.