Omaha Gets it Right: This is Why You Use a Valuation
A recent tidbit from the Omaha World Herald caught our eye. The paper responded to a query we hear all too often: “I’m looking to buy a business but the price seems high. Now what?”
The Herald responded:
[blockquote background=”#ffffff”]What you want to be cautious about is allowing the seller to “plug” a number in as the sales price and state that is what it is worth, no explanation and no supporting information. Usually what happens in the negotiation of a purchase is that a third party is introduced to provide an independent business valuation. If this is the case, a buyer should ensure that the valuation analyst is using standards that are set by the nationally recognized association [such as NACVA] dedicated to this service. [/blockquote]
Spot on. Yes, a valuation analyst is going to work through the scenario and help the buyer understand what a reasonable fair market value is for the company.
But let’s take it a step further: the analyst will help understand what is (or should be) included in the price. Is cash and AR included? AP paid off? Inventory included or expected to purchase separately? Is the inventory number reasonable or does it include excess, slow moving inventory? There’s an old yarn in the M&A / investment banking world that says “you name the price, I’ll name the terms.”
Your valuation analyst can help you with both – first understanding if the price is reasonable, and then confirming the terms correlate to the price.