Value vs. Price: Understanding Valuation for Strategic M&A

Valuation, establishing the financial worth of a company, is an important step of the acquisition process. People often get excited about valuation and start crunching numbers in order to reach the best deal. However, before you become too focused on the financials, remember that valuation and price are not the same. I have seen many executives spend weeks pouring over Excel spreadsheets only to arrive at precisely the wrong number.

Valuation vs. Price

Valuation is the financial assessment of a business that is calculated using an accepted methodology. Valuation can be used for many purposes including strategic management planning, gift and estate tax compliance, accounting, and M&A. In an acquisition, valuation gives you a sense for what you should pay for the prospect company.

Price, on the other hand, is negotiated in the acquisition agreement and may not be the same number at all. A number of different issues, including deal structure and other non-financial aspects, may affect the dollar value you pay for the company. If you are a strategic acquirer, you may even be willing to pay more for a company in order to swiftly execute your strategic growth plan or to block a competitor from purchasing it.

Using Valuation in Acquisitions

Valuation is both an art and a science because there are many ways to calculate a company’s value. Calculating the value of a company is much more than just plugging numbers into an equation. You must obtain the relevant financial information, apply the appropriate techniques and develop the correct estimates.

The three most common methodologies are the asset approach, the income approach and the market approach. Using each method you will arrive at a different number. In addition, when calculating the value of a company for strategic acquisitions, you are attempting to value future performance, which is only an estimate at best. Determining the appropriate valuation methodology and assumptions to use requires experience.

Join us for a webinar on Mastering Valuation for M&A with Valuation Advisor Todd Nelson. Todd is an Accredited Senior Appraiser (ASA) and Certified Valuation Advisor with more than 18 years’ experience in complex valuation matters including strategic mergers and acquisitions.

Key topics:

  • Basic theory of business valuation
  • How to gather useful data on the economy, industry and specific businesses to assist in valuation accuracy
  • Basic business valuation fundamentals and techniques
  • Appropriate methodologies for your valuation purpose
  • Developing equity and invested capital discount rates
  • Understanding the sources of variables used in the development of a discount rate
  • Common adjustments for constructing normalized income statements

Date: Wednesday, September 21, 2016
Time: 1:00 PM ET – 2:30 PM ET
CPE credit available.

Photo Credit: Horia Varlan via Flickr cc

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