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If you have ever tried to buy or sell a business, you have probably been on one side of a conversation regarding valuation. Buyers are motivated to avoid overpaying for a target company while sellers want the highest valuation possible. This difference in natural desires of buyers and sellers creates what is generally referred to as a valuation gap.
Three Tips For Closing Valuation Gaps In M&A Transactions:
1. Contractual Solutions
Often, valuation gaps result from a difference in future performance expectations and/or the importance transaction optics. Contractual solutions like earn-outs, pricing of stock consideration, clawback provisions, etc., can close the gap by aligning buyer/seller goals and present an optically acceptable purchase price for both parties.
2. Prudent Negotiation & Expectation Management
For buyers, it's important that seller have a proper understanding of what their company is worth. Many sellers have never sold a business before and are emotionally attached to their businesses (after all, they've probably spent most of their time building their business).
It's important that both buyers and sellers understand the opposite party's position. Buyers need to be careful not to inflate a seller's ego (and thus valuation) just because they are excited about closing a particular deal.
3. Purchase Price Mix
Similarly to contractual solutions, adjusting the purchase price mix can align incentives and provide optics acceptable to all parties. Less cash and an earn out, future priced stock, employment agreements, etc. can all be used to close the gap in a mutually beneficial way.
Acquis Capital is a private investment firm that specializes in strategic acquisitions. Acquis Capital's mission is to facilitate strategic acquisitions that increase the book and market value of top tier public companies, with market capitalizations under $300 million. To learn more please contact us today.
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