DO NOT NEGOTIATE BEFORE APPRAISING


In the corporate world exist the possibilities of companies being created, purchased, or simply modified.  There is no fourth possibility.  This fact can be proven.

Existing these three possibilities, an entrepreneur, sooner or later, must select one amongst these three.

By way of example, in the event a national or multinational investor were interested in the purchase of our company, we ought to have the means to be able to raise its fair value, notwithstanding the value offered.  Our knowledge on these matters must be clear and without the shadow of any doubt.

Although for the time being we are not interested in selling, the mere fact of receiving an offer shall arouse our curiosity to know its current intrinsic value.

In the event we do not have a company yet, only in our imagination in the form of a project to be built, for reasons of financial protection we will surely be interested in knowing the cost – benefit of the investment, this means, whether the profitability it is expected this project to produce does compensate the risk it bears, going into the limited liability corporation area.

In the event we do wish to modify our company, by way of example, adding a new production line due to the demand of the market itself, this modification shall become valid only in the event that to our knowledge the value of the company before the modification, adding all investments provided for, were less than the new value of the already modified company.

The case of the calculation of the value of a brand name is framed within this company modification example, as well as the cases of mergers, acquisitions, the evolving of new products, access to new markets, implementation of new technologies, justification for loans, contracting specialized personnel, clients portfolio acquisition, replacement of equipment as well as the restructuring of capital, going public and Inicial Public Offers (OPAs), amongst others.

And finally, in the event we wish to view the performance of the company for a period of time, let us say one year, we can calculate its value on any given month and thus confirm whether the company did increase its value or not.

With regards to all these possibilities, both aggressive as well as friendly, to which we might exposed, the question must be, logically, “How do we react?”

We affirm that our best advise is: “Do not close any deal without assessing first”.

This is simple, yet, when the volumes of money involved do affect the financial health of our pocket, we would, later on, understand that the best decision was that one: “First assess, then start negotiations”.

A second issue that comes now to our minds is whether the entrepreneur and his team of evaluators, be they company employees of outside consultants, could they calculate that value with an acceptable level of accuracy.

¿Who could ensure that?

What actually does happen when a company is about to be negotiated, the selling entrepreneur will ask for the sky, his evaluation team most probably will calculate a value tending towards high values, on the other hand, the purchasing entrepreneur will offer very little and his evaluation team will, undoubtedly, a value tending towards lower values.  What we are sure of is that the price calculated by the selling party might be correct, or that the price calculated by the purchasing party might also be correct, or that both parties might be wrong. Summarizing, who could tell with assuredness which one is closer to reality? Our problem really concentrates on “How reliable is the calculated value?”.  Consult Reliability test of an Appraisal.

On the purchasing party’s side, frequent errors are to pay too much or to offer a value unfairly low, loosing the negotiation.

On the selling’ party’s side are frequent errors to receive too little for the sale or to ask for values exaggeratedly out of reality, also loosing the closing of the deal this way. In both cases, the interest of entrepreneurs, their partners and their shareholders, in the event of an open – capital company, is damaged.

Most assuredly, the concern about the assessment being reliable is the Achilles’ heel in the life of many entrepreneurs, managers and assessment consultants, due to the fact that in many occasions, using the same data about the company to be assessed, different values are calculated through different outlooks and methodologies.  ¿How can it be that two individuals competent for this assessment job do arrive to different values starting up with the same input?

The answer is that either, or both, are not using properly the methodology for assessment.

Another problem that does occur is on assessments is that both parties, sometimes attempting to favor their interests, do present scenarios that normally are removed from reality, generating distorted prices.

For this reason it is advisable that the assessment teams of stakeholders be enhanced by competent appraisals.  These appraisals always will approach the intrinsic value of the company to be traded, submitting a universal, fair and defensible analysis before any entity interested in the purchase / sale of the company.  The consultant shall also have the central role of attorney that shall advise in a technical manner about the “pricing” of the company about to change hands, the project about to be built, or the modification about to be implanted.

Be it an acquisition, a sale, a merger, a modification, or the creation of a new company, the responsible entrepreneur must get as much reliable data as possible, and use competent professional services.  Man reached the moon through the summation of the efforts of many suitable individuals.

Never risk your assets in an irresponsible manner.  Only in part, the useless, but in a professional manner.  If you do know how to evaluate, excellent!   If you are not a specialist, get one and succeed!

_____________________________

Isaac Hayon Sasson is a Mechanical Engineer, Executive MBA, specialized in Corporate Finance, consultant in the areas of corporate assessment, engineering projects, construction of factories, recovery of companies and company modifications.
E-mail : isaach@sti.com.br      Site : www.valordeempresa.com

"Never allowed to somebody the management of your money"