Company Valuation and Business Valuation Standards of Value for Litigation, Mergers & Business Brokerage and Other Situations

Levels of Value for Company Business Valuations and Appraisals

Business owners who are thinking of selling their business or doing routine succession planning need to understand the value of their business. Often owners are surprised when they learn that company value, enterprise value, or business value found might be dramatically different depending on the situation.   The value of the business is usually determined by what it is worth to others.   From that standpoint, it makes sense that buyers in different situations might have different values. This is because different buyer types will be able to make different amounts of money (both theoretically and actually) from the business.

Below I discuss Strategic Control Value.

In my next Post I will discus Fair Market Value and Minority Interest Fair Market Value.  These are the main standards of value used.

Strategic Control Value. This value is the value obtained when 2+2=5. This buyer is often called a synergistic buyer. Namely the acquirer can obtain more value from the target than the target can make on their own. This can happen because of operational efficiencies or because of the ability to increase market sales with incrementally lower costs. The classic example of an operational efficiency is two delivery companies running the exact same routes. If they merge the combined entity should be able to deliver the same packages with substantially less trucks and drivers. An example of the ability to increase market sales is when a small software company is purchased by a larger one who has a sales force that is already established in the industry the software is designed for.

Studies have shown that operational efficiencies are more predictable than sales and revenue increases. For owners it is important to remember that while strategic buyers and strategic value exists in terms of day to day operations you must run your business as if you will own it forever without a strategic buy-out. If you can modify your business plan to court a strategic buyer without putting your day-to-day efficiencies and operations at risk fine but never put yourself in the position of only having one buyer or being inefficient with the hope of attracting one buyer.

In summary strategic control value is a high value that can only be met in certain times by certain buyers.  It is worth calculating when you are going to sell and strategic buyers are a real possibility.  It is not worth putting your whole company at risk for to obtain if it limits current profitability or future options.

 

Greg Caruso, Atty, CPA, CVA
Harvest Business Advisors
Business Brokerage, Company Valuation, Business Appraisal
Princeton New Jersey, Baltimore Maryland, Columbia Maryland
gcaruso@harvestbusiness.com