How much should a buyer pay for an acquisition? The short answer is, it depends. Because each company’s situation is unique there is no one rule of thumb for naming your price.
Valuation is one of the critical components in establishing the financial worth of a company. In mergers and acquisitions one of the most commonly used valuation methodologies is discounted cash flow because it takes into account the expected future performance and growth generated by purchasing the prospect. There are also other methods including the market approach, where you compare the transaction to similar deals to establish its worth, and liquidation value, where you determine what the business would be worth if it closed down today.
While valuation provides guidance on the financial aspects of a deal, it is not the same as price because using different methods often produces different results. Valuation must be paired with an evaluation of the non-financial aspects of a company. Before even getting down to numbers you must answer the question: Is this company a good strategic fit?
Bringing together the financial (valuation) and non-financial (evaluation) pieces of the puzzle will help you determine the price of an acquisition and how you will negotiate with the seller. At the end of the day, the real question is not how much you should pay, but how much the company is worth to you.
Learn more about valuation in our webinar on September 20, “The Basics of Business Valuation for Mergers & Acquisitions”
Date: Thursday, September 20
Time: 1:00 PM EST
CPE credit available.
Photo credit: Ervins Strauhmanis via Flickr CC BY 2.0