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No one wants to overpay for an acquisition, and every business owner wants to achieve the highest price possible. But how should a buyer go about putting a fair and accurate valuation on a business without going in so low that the deal is scuppered?
The valuer will typically apply a number of valuation approaches as part of their work, including the market approach or earnings method to arrive at his final position.
If there is a concern with regards to the achievability of projections, then earn-outs or deferred contingent consideration can be effective.
Valuation can be revisited at any stage.
Professional business valuers firstly gain a thorough understanding of the target business and then leverage this knowledge with an understanding of the key value drivers of the business to determine market valuation metrics, for example, earnings before interest, taxes, depreciation, and amortisation (EBITDA), before determining an appropriate value for the business in question.
By providing this knowledge to prospective buyers, they, in turn, are armed with up-to-date, relevant information.
The use of such structures is applied to incentivise sellers to stay on with the business post-acquisition and reward strong post-deal performance, with payments becoming largely self-financing for the purchaser.
However, caution must be applied when determining the level and terms of earn-outs and deferred consideration so as to ensure the terms agreed to are appropriate with advisors engaged to ensure requisite safeguards are in place to direct future payments.
Obviously, however, any unwarranted or unsubstantiated return to valuation post-signing of HOTs (heads of terms) will jeopardise the deal, but where warranted, perhaps due to the unearthing of risks or adverse findings during diligence, revisiting valuation can be appropriate.
The key is to address this in the right way with the sellers. Strong communication and rationale are key, along with adopting a commercial and sometimes innovative approach to finding workable solutions, such that the deal can proceed. For example, deferred contingent consideration can often represent a workable solution for both parties. Your advisors should be able to guide you through these negotiations whilst ensuring a strong working relationship between the buyer and seller is maintained.