I received an inquiry from a gentlemen asking if a valuation would be required for his company to be acquired by a public company. He obviously has someone in mind. A valuation isn’t required, and probably isn’t the best way to ensure the best price.
Is a valuation actually required for an acquisition by a public company? No, not required. I’m getting ready to close a deal by a public company and a valuation wasn’t done or asked for. If bank financing is required the bank may require one, but that would be one the bank would initiate later (they will not accept one initiated by the seller). An audit by a CPA may be required if you are large enough compared to the public company, but usually that isn’t required either.
Now, do you want a valuation so you can justify a particular price? That probably will not work as well as you might think. The public company isn’t going to automatically pay what the valuation says, regardless of how expensive or how many pages are in the valuation. Why would they? Typically they will offer less. Depending on the situation it could be a lot less, and they will not readily move on the price. Again, why would they (unless they had reason to believe someone else may get it)?
There are a lot of reasons why the value to the public company would be less or more than what a valuation would state. Your company may actually be worth a lot more (economies of scale and other synergies), but they are not going to admit that. I once did mergers and acquisitions work for a large multi-billion dollar company and we would go through the entire process of acquiring a company and would never show them how much money we planned on making by acquiring them. That was contained in a financial model that the seller would probably never see, and certainly not before the deal was closed.
The way to get top dollar is to make the public company compete with other companies to acquire your business. In other words, the only way to get market price is to go to the market. Allow competition and free market forces to set a price. A valuation guesses at what this price may be using statistical averages, but the only way to actually see the highest price is to get out there, contact buyers and let the process run. After that process, you’ll know the actual maximum selling price of your business, whether it be from an offer from the public company or another bidder.
Want to learn more? I’ve organized and categorized my blog posts into a free online guide on how to sell a business: www.sellbusinessguide.com