Permanent Podcast: Real Talk About Private Equity and Buying, Selling, and Operating Small Businesses
Negotiating: Formulaic vs. Numerical Deal Value (EP.28)
Sep 23, 2019
Pros and cons of formulaic and numerical approaches to valuing a business in a sale, including the importance of recent performance and potential complications. Benefits and considerations of using formulaic versus fixed number approach in negotiations, emphasizing understanding adjustments and discussions related to post-cap X net owner earnings.
04:20
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Quick takeaways
- Different buyers may use various methods to value a company, such as multiples of earnings or complex formulas, each with their pros and cons.
- Having a fixed valuation number provides more certainty in a transaction, but it is important for both parties to agree on adjustments and earnings to avoid significant gaps.
Deep dives
Different valuation techniques
Perspective buyers may value a company using different techniques, such as a calculation of future earnings or a multiple of trailing 12-month earnings. Each technique has its advantages and disadvantages. Finite numbers provide a better understanding of the transaction, but may not consider recent positive performance. Formulaic approaches introduce more unknowns and can complicate negotiations. For example, adjustments made to earnings for non-business expenses may differ between the buyer and seller, resulting in significant gaps in the final valuation.
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