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Independent valuation and price negotiation

A closer look behind the attractive package can reveal concealed flaws and financial risks

A business for sale may seem like a lucrative proposition and a bargain deal at first glance.

However, a closer look can reveal concealed flaws and financial risks behind the attractive package.

Expert transaction advisers are needed on your side to cover all bases when you are considering the purchase of a company. Ask a corporate lawyer to interpret the legal jargon in the fine print of sale offers and contracts.

He can recommend revisions to unacceptable terms and conditions to protect your interests. You may also seek the help of an accountant or financial specialist to review the books and spot irregularities.

Qualified independent valuator

Above all, it's strongly advised to consult an independent valuator for an objective appraisal to closely approximate the fair value of the business. You can find a qualified valuator on the website of the Canadian Institute of Chartered Business Valuators (CICBV) or contact the institute for more information.

The institute requires members to adhere to its code of ethics and standards in the practice of their profession. To be safe, ask for client referrals or recommendations from trade associations and business associates.

Types of valuation reports

Under CICBV's standards of practice, a chartered business valuator can prepare three types of valuation reports, namely, calculation, estimate and comprehensive reports. The three reports differ in the scope of work, extent of disclosure and degree of assurance in their findings.

Valuators typically review a business under five categories: economic environment, context of the industry wherein the company operates, non-financial information, financial data and valuation assessments.

"It makes logical sense that the bigger the purchase and higher the stakes, the more detailed and in-depth the report should be."

The conclusions arrived at in the reports are based on the depth of research, analysis and verification of relevant information. A calculation report provides a basic overview with minimal review and analysis of the business and its assets.

An estimate report furnishes a moderate review, analysis and confirmation of facts. In a comprehensive report, a valuator is expected to employ reasonable efforts to conduct thorough research and analysis of all available data and external factors that can have major impacts on the conclusions presented.

Crucial facts and figures

It makes logical sense that the bigger the purchase and higher the stakes, the more detailed and in-depth the report should be. Ask an experienced valuator for his professional judgment as to the type of report necessary under the particular circumstances of a business acquisition.

Essential information and statistics to dig into include outstanding debts, pending litigation, past performance and current finances. Intangible assets are also significant considerations, including sound management, intellectual capital, skills and talents of the company's employees as well as business relationships with clients. Promising potential for growth and profitability are vital value drivers as well that can turn the business purchase into a worthwhile investment.

Savvy price negotiation

Being armed with facts equips you, the buyer, with better bargaining power at the negotiating table. Put into practice some smart negotiating techniques to strike the best deal possible to the mutual satisfaction of both parties.

Set a maximum price you are willing to offer so you don't go beyond the realistic fair market value of the business. A more favourable position for you as a buyer is to allocate more to hard assets. While soft assets have their value in business, they tend to increase the price of the business from the seller's perspective.

Be firm on major matters such as your purchase price limit, but allow for flexibility and compromise on less important points of the deal structure. If you give in to the seller's stipulation on one item, you may in turn request some leeway such as instalment payments on a portion of the purchase price.

Maintain open communication lines and the dialogue focused on relevant matters. Should issues of contention arise, keep a cool, reasonable attitude when addressing conflicting interests and resolving them. Exercise caution and patience as due diligence can be a long drawn-out process.

Reach an agreement with the seller about a realistic time frame for the negotiation period. A give and take stance facilitates the negotiation toward an amicable, successful conclusion.

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