Pre-bid valuation – a buyer dilemma

Date: 5 September 2011

Pre-bid valuation – a buyer dilemma

I’m starting to realise that I work in a malfunctional marketplace (mergers & acquisitions) where the buyer and the seller has limited knowledge about the opportunities and risks in a transaction. Not that this comes as a surprise, I have made it my career helping both buyers and sellers bridge differences in information and expectations, and I have become good at it.

Consider the simplicity of buying a share at the stock exchange, and more important, the simlicity when the remorse hits you to trade it back with minimal loss. The unquoted market for company shares is a whole different game. Here both buyer and seller is spending a lot of money and time to make sure that no mistakes are made in a, often, competitive salesauction.  The number one issue for the buyer is to value the target company without really have enough information at hand. A very difficult task. Therefore professional advisors on both the buyer and seller side is needed. In USA normally defined as “intermediaries”.

In Sweden there is a huge gap between the professionalism and in-depth knowledge of investment bankers and small-cap business brokers. This tend to create a huge gap between the Seller side and the Buyer side. More importantly, the Seller side do not always understand how to bridge the information gap in order to support the valuation of the target company. The solution for both the buyer and the seller is to refer to typical multiples in order to safely price the target company. How many times have I heard that a company is worth 4-5 times the profit? Even without defining which profit or what sort of value we are talking about. The information gap and the expectation gap goes hand in hand. Usually a loss for both the buyer and the seller as many transactions are abandoned!

We need better intermediaries and business brokers in order to take away unnecessary friction in the marketplace!

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