SPECIAL INTEREST PURCHASERS - Will they pay more and how much?
December 2007
When determining the Fair Market Value of a business, a valuator will normally address the possible existence of special interest purchasers or strategic buyers in the marketplace who would possibly pay a premium over and above the stand alone value of the business.
Stand Alone Value of a Business
The concept of "stand-alone value" is based on the notional Fair Market Value of a business or business interest, without considering the premium paid by the purchaser for actual or perceived post-acquisition synergies or strategic advantages. A strategic purchaser would pay more than another purchaser for a number of reasons; one being that they have in-depth knowledge of the business and industry; another being the ability to enhance the business through integration with the purchaser's existing operations which may generate cost savings through efficiencies or increased sales and profits through synergies achieved.
The Special Purchaser Premium
The first determination or challenge is to identify, if possible, the existence of a special purchaser. Normally this would be either a competitor or another business with complementary operations in a same or similar industry; possibly including companies that wish to vertically integrate certain operations or processes. Another consideration is that once identified, the special purchaser must have both the motivation and financial ability to transact. It may be difficult to determine if these attributes are present.
Next the valuator must quantify the purchaser-perceived, post-acquisition economic benefits resulting from the transaction. Since value is determined by the purchaser, there can be as many possible prices as there are potential purchasers for a business. Each purchaser will view the synergistic benefits differently and as they pertain to their unique circumstances. The quantification of these benefits may include estimates of cost savings, such as elimination of duplicate sales and marketing costs or estimating manufacturing efficiencies. Management would be interviewed to determine the nature and amount of these benefits.
If a willing and able special purchaser can be clearly identified and the perceived net-economic value achieved through synergies can be reasonably quantified, then the valuator can add a special purchaser premium to the target's intrinsic, stand-alone value in a notional context, to arrive at Fair Market Value. This premium is the difference that a special interest purchaser would pay to acquire the business over and above that which "ordinary" or financial purchasers would pay.
The premium would be estimated based upon reasonable negotiations between parties. A purchaser would not pay, dollar for dollar, for 100% of the benefits acquired.
The Bidding Process
It is interesting to note that if there is only one special purchaser, then the purchase price may be only nominally higher than what ordinary purchasers would pay. This assumes all purchasers have equal information.
If there are two or more special purchasers, then there would be competitive bidding, and ordinary purchasers would be excluded. The special purchasers would bid up the purchase price to take into account the perceived value to them.
Summary
In general, most vendors of businesses will achieve a higher selling price to a strategic buyer than to a financial buyer. It is useful for business owners and managers to identify other competitors in their industry and consider the possible synergies and economic benefits that may be achieved if a sale would be to such a buyer. A business valuator may be able to assist management in that regard in order to quantify a special purchaser premium.
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