Q & A Table of Contents
Setting The Value Of A Business
From: Ray, Los Angeles, California
Question: What is the best valuation technique to use when valuing a small, real estate company? The real estate company does primarily residential properties, is well established in a small town, and is the leading (by volume) producer in town.
Response: Agreeing on the value of a business can involve many elements: the egos of the buyer and the seller, how badly the seller needs to sell, what alternatives the buyer or seller may have if they can't agree on a deal, and what kinds of objective criteria the buyer and seller are comfortable relying on as a measure of the business's value.
Objective criteria are measures that are utilized by experts in determining value or price; the best known devices used as objective criteria in many countries are the books that are produced every year which describe the price range applicable in the sale of used cars. In selling a business, objective criteria may be found by asking a banker how much they would lend a buyer of a given business or how much a venture capitalist would pay for the business. Each of these needs to be accepted for what it is; both bankers and venture capitalists have their own peculiar objectives that may not be relevant to the buyer's or seller's objectives.
Looking at value from 'outside the deal' -- getting the opinions of disinterested third parties -- may also be a sensible way to get objective measures of the value of the business.
None of the other issues raised in the first paragraph lends itself to the same sort of objective measurement. In this case, the free market definition of a fair price has to prevail: it is what a willing buyer is prepared to pay a willing seller -- or what a willing seller is prepared to accept from a willing buyer.
Valuation is often in the eye of the beholder. Finding an outside, objective mechanism for judging the fairness of a price can make life a bit simpler -- but the parties to the deal still have to agree for it to work successfully.
Good luck,
Steve
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