That is quite the paradoxical concept. Yes, it is in truth and in practice.
First, there is no single definitive value for any company. If you paid for 10 business valuations you would get 10 different values.
Which ones are right and which are wrong? Impossible to tell.
All business valuations are subjective. Sure, there is a litany of things that are factored in that are factual or that present hard numbers. Over and above all of that comes the subjectivity.
The subjectivity is not a one-dimensional factor. It is easy to be methodological and assume that the seller is subjective high and the buyer is subjective low. Those are typical prevailing conditions.
However, they may not be part of the final determination.
The real value of the company is WHAT IS IT WORTH TO THE BUYER?
Every buyer has their own (hidden) agenda. One might need to deploy 20,000,000 before the end of the year. One might only have board authorization to spend 18,000,000. The best one is the one with an ego who cannot tolerate being outbid. Then there is the buyer that did a very detailed analysis and concluded that the company is worth 19,000,000 to them and they won’t go over by one dollar based upon principal.
I had one recently where the seller wanted 30,000,000 based upon complete subjectivity.
BTW – the seller’s position should not be based upon “what they NEED”. It should be based upon the objective value of the company. I convinced him that the absolute maximum price he could get was 20,000,000. He responded rationally and we proceeded with his offering.
The best offer than came in was 18,000,000. I tried several times to get the buyer to move their offer up and they refused. I presented the final offer to the seller and he choose to leave 18,000,000 (retirement plus next generation money) on the table and do a hard pass.
Both parties walked away amicably. Now the seller has and will have “walk away remorse” for the rest of his life. The value of his company plummeted and he is still toiling 60 hours a week in hopes of getting it up to 5,000,000 to 10,000,000.
The old stock market adage comes to mind. “Pigs get fed and hogs get slaughtered”.
I also have another real-life experience from my career. This is a clear example that the value is what it is worth to a specific buyer.
I was the Chief Accounting Officer for a health care company. We started with zero percent market share and ended up with 72% market share nationally. We acquired all 9 of our competitors and did a very successful IPO.
It was not possible to acquire every competitor by paying market value. We offered everyone of them 120% of market value (and a second bite of the apple too).
Industry skeptics laughed at us and said we were going to crash and burn since we were so dramatically overpaying.
Yes, we were purposely overpaying compared to traditional market conditions.
However, they did not know what we knew!
We averaged 2.2 services per hospital contract. The companies we were acquiring averaged 1.1 services per hospital contract. We were exceptionally confident that we could double the revenue at each acquired hospital contract within six months.
So, from our buyer’s chair we felt that we were getting a tremendous bargain at 120%.
It all depends upon where you sit.
It is very important to engage a strong M&A advisor that can really stimulate the market and ensure that a very large number of buyers review your offering.
I always say it is like selling a used car. If you only have to sell one, it is not that hard to find an ideal buyer. If you had to sell 10 it would be nearly impossible. You are only selling one company and you deserve an ideal buyer.
A well planned and executed offering will always yield the most favorable outcome!