You’ve spent weeks building the perfect valuation model. You’ve included growth forecasts, estimated costs, calculated discount rates, and determined a valuation range you’re confident in. But now comes the hard part – determining the right price for the business. How do you bridge the gap between your valuation and a price that will resonate with …
You’ve spent weeks building the perfect valuation model. You’ve included growth forecasts, estimated costs, calculated discount rates, and determined a valuation range you’re confident in. But now comes the hard part – determining the right price for the business. How do you bridge the gap between your valuation and a price that will resonate with the market?
If you price too high, potential investors could lose interest resulting in an unsuccessful transaction. Too low, and you leave money on the table or struggle to fund operations or growth. The key is finding a price that balances your valuation with investors’ demand and willingness to pay. It requires both art and science. In this article, we’ll walk through strategies to help get your valuation closer to pricing.
Understanding the difference between Valuation and Pricing
You’ve built a solid valuation model and are confident in the numbers. However, these numbers differ from the number on which the buyer and seller shake hands. What gives? Which is the accurate number? As the seasoned investor Warren Buffet puts it, “Price is what you pay, value is what you get”. Valuation calculates what a business is worth based on its assets, growth and earnings potential and risk. On the other hand, pricing refers to what buyers and sellers agree to exchange the company for in the real world. There are several reasons why a valuation and final price can diverge:
Bridging the Gap
While most of the factors that cause the valuation and pricing numbers to diverge are external and largely unpredictable, it is important for any modeler to get their valuation as close as possible to pricing to strengthen their negotiation. Some of the approaches to bridge the gap include:
You’ll establish a grounded and compelling valuation with a balanced, well-supported approach that accounts for the market perception and conditions. And one that moves you closer to a price you and the buyer can agree on.
Negotiating the Best Deal
When all is said and done, pricing is still an art, and we cannot ignore the place of negotiations in arriving at a price. A few pointers as you go into the negotiations:
So there you have it. The key to bridging the gap between your valuation and real-world pricing is factoring in the market perception. Carefully pick comparable businesses, use industry-specific multiples and account for market conditions. And remember, pricing is an art as well as a science. The final price depends on more than just the fundamentals. It comes down to the motivations and perceptions of the buyers and sellers. With diligence and an eye for the human elements of the deal, you’ll be negotiating with confidence, knowing your valuation is as close to the mark as it can be.
At InVhestia Africa Ltd, we have a skilled team with extensive experience conducting valuation across various sectors for both sell and buy-side clients. Our experience in leading negotiations with investors and entrepreneurs will ensure you get the best price for your business.
By Kimali Simon, Associate InVhestia Africa Limited