From value to company price

While a company's valuation is the result of mathematical and financial calculations, the price, on the other hand, is the outcome of a process, a transaction. So, what is the relationship between the two : can the price be lower or, conversely, higher than the value ?

Valuation, a theoretical figure

In the field of business valuation, one can define value as the result of a series of calculations derived from the use of valuation methods. More than a precise figure, a thorough valuation will yield a range of amounts. It can be said that the valuation of the company falls between x and y, with a range width of 10% to 15%.

Even though those valuations result from financial formulas, structured and thoughtful assumptions, they still remain theoretical, complex, and even subjective. They are indeed based on a set of company-related data and economic environment factors that are subject to interpretation. Above all, they need to be compared to the market.

In contrast, the price is concrete, unique and real.

While the valuation will be expressed as a range in thousands of Euros rounded, the price will be precise and may even include cents of Euros.

So why isn't the price always equal to the value, or at least close to the center of the valuation range ? Why do we sometimes see it significantly above the upper limit of the valuation range or, conversely, well below the most modest estimates, or even nonexistent ?

What about the difference between the value and the price of a company ?

The difference between value and price is explained by factors both internal and external to the company being evaluated.

• The first reason explaining a significant difference between value and price can be insufficient analysis of the company and its market by the evaluator, which is less often a criticism directed at a buyer. An evaluation can be of poor quality, whereas a price is rarely the result of an error. There are, for example, endogenous aspects, meaning those related to the company itself, that an evaluator may overlook or fail to see. In this regard, we can mention l’intuitu personae of the manager, that the evaluator may not consider if they haven't observed the "personal touch" of the manager, even though this "intuitu personae" factor could make the sale impossible and, therefore, obtaining a price.
• On the contrary, strong market entry barriers can be a competitive advantage for the company operating in it, reducing its risk, which may be incorporated to some extent into the valuation but possibly underestimated. In the same spirit, we can mention factors such as the organization of the company, the presence (or absence) of qualified management, dependence on key individuals, concentration of customer and supplier portfolios, potential compliance requirements, necessary product/service range renewal, recent investment levels, visibility into future financial periods, and more.
• Other aspects, this time exogenous, can be considered differently by the evaluator and the investor/buyer : the economic environment and the overall business climate. In the bond market, it's customary to say, "When interest rates rise, prices fall." This adage is also applicable to the prices of companies. Some business model can be challenged by lifestyle changes, as has been observed since COVID-19, or due to the emergence of new regulations. Similarly, is the company's industry in good health, experiencing growth ? Is there a strategy of consolidation, integration, or concentration that is driving the market ?

However, the simple valuation may not always fully consider these factors that the market placement will immediately highlight. Valuation can have a time lag compared to the market...

To obtain a price, one must find a buyer

Will there be many parties interested in the case ? Will they be solely local, or on the contrary, will the company attract foreign or even distant buyers ?

The motivations for acquisition also influence the price of the company. Is it a simple addition to the product range, or, on the contrary, is it a necessary or even vital market share acquisition for the buyer ? Is the purchase aimed at acquiring a new technology that the buyer will have the means to introduce to the market and develop ?

The synergies that this acquisition will enable mergers and acquisitions, can also influence the offered price. However, the acquirer will want to keep as much of these synergy gains for themselves as possible and will limit their use in the price formation. But if they are in competition, and the seller hesitates to accept their final offer, they may be tempted to improve it, including in the price a portion of the value they will contribute to creating after the acquisition, by developing synergies and economies of scale between the target company and their own.

These are all factors that will influence the valuation, and therefore the offered price, either upwards or downwards. It's important to remember that a transmission is a meeting between supply and demand, between a seller and a buyer of a company.

Clearly, the current evolution of the business climate is making buyers more cautious and significantly more selective. It's essential that the target company aligns perfectly with their strategy, fits well into their « core business ».

A few years ago, a list of 12/15 well-targeted potential buyers was sufficient to find the final buyer in most cases. Today, it is necessary to establish a list of 40 to 50 names to achieve the same result.

To conclude, from the transition from value to price...

Thus, the specific characteristics of the company and its economic environment will influence the transition from value to price, either upward or downward. However, the most decisive element, especially to be at the top of the range or even exceed it, will be the seller's ability, with the help of their advisors, to prepare the operation and then implement a process to identify and approach the most qualified and motivated potential buyers to offer the best price and achieve an optimal transition from value to price.

If value can be likened to a runway marker, which requires a good understanding of the company, its strengths, weaknesses, and its environment, then price will be the landing, depending primarily on a good selection of approached buyers and a successful negotiation.

Hence, a company can have a value but no price !!!

Vincent JUGUET

MBA Capital Paris