Valuation and Pricing of the
Price is the paramount issue in a merger and acquisition transaction. Beyond anything else, it determines the amount of value that is transferred to the seller in exchange for ownership of the business that is for sale. It is the number one concern for both buyers and sellers, and it ultimately determines whether or not a transaction can be consummated. It is also always critical to distinguish between price and terms. The price could be very favorable to a seller but be crippled by alternative terms that make the transaction unpalatable, costly, and risky. There are several established and traditional valuation methods used to estimate the price range within which a business will be sold. The actual price, however, is ultimately determined by what companies are actually willing to pay, which will be as much a function of market conditions as it is of economic formulas.
Although a formal valuation of the seller’s business is a vital component of the buyer’s analysis of the proposed transaction, it is important to realize that valuation is not an exact science, nor will valuation alone typically drive the terms and pricing of the transaction. There are numerous acceptable valuation methods, and in most situations, each will yield a different result. Unfortunately, no method will answer the question: “How much is the business actually worth?” That question can be answered only through the receipt and negotiation of term sheets. The reality is that the market determines the price, and valuation, while an important exercise, is only indicative of what the market has paid for