Investment Value vs. Fair Market Value

August 2001 Continued from July 2001

In our previous newsletter we discussed that it is how well the seller’s company meets individual buyers’ strategic objectives that creates investment value premiums. For this reason, a seller’s company should be presented to many strategic buyers. For the lumber products company, these buyers would include horizontal integrators—other lumber products distributors; vertical integrators—manufacturers of plywood, particleboard and others. Presenting to multiple qualified buyers creates competition and maximizes the oppor-tunity to find the best-fit buyer willing to pay the highest premium.

Next, be wary of unsolicited inquiries. When a buyer calls a seller expressing interest in acquiring the company, the seller may be setting the stage for what will be a fair market value transaction at best. Investment value opportunities become limited if the seller begins sharing information exclusively with one buyer. From a negotiating perspective, this puts the seller in a reactionary posture, usually resulting in losing control over the content, timing and flow of information. Obtaining premium value requires the seller to maintain control over the selling process.

Third, sellers must correctly identify areas of value. Emphasis is usually on revenues and earnings which support a fair market valu-e conclusion. Instead, identify and emphasize those intangibles that can create investment value. These include market area, market penetration, name recog-nition, depth of management, synergistic benefits, unique products, patents, and more.

Finally, sellers must understand each potential buyer’s strategic objectives if they are to properly position their company to maximize its value. Sellers should question buyers regarding their interest in acquiring the company. Try to determine the synergistic fit—you’ll learn much more than you realize. Review marketing materials; talk with others in the buyer’s industry and with the buyer’s sales personnel. If the buyer has made other acquisitions, speak with the sellers. If the buyer is a public company, request an investor package (annual report, press releases, and more). Various securities firms may have analyst reports available.

Your objective is to get investment value instead of fair market value for your business. Using these strategies together with good negotiating skills can result in a transaction that is excellent for both the buyer and seller.