With the shaky economy, I am constantly hearing clients talk about how to get through the tough times now.  While this is obviously a valid concern, I caution them not to forget about the future - specifically future demand.

Future demand is king for reasons that are self-evident, once you pause to think about it. Ultimately your growth will depend on your success in meeting the needs of customers you have yet to capture. What do they want today? What will they want in the future? Business winners are the ones who best answer these two questions, especially the second. At Capstone, we put painstaking effort into market research, and go to great lengths our attempts to predict future trends.

Once the orientation has shifted to future market demand, a tremendous clarity emerges in the strategic process. We have a basis for defining our criteria for decisions like: which direction to grow, which growth tactics to adopt, where in the market to focus and what to add to our current resources.

Although times may be tough now, your success as a company depends largely what plans you make for the future.

Technorati Tags: Acquisition Strategy, acquisitions, David Braun, demand, External Growth, future demand, M&A, market research, Mergers and Acquisitions

I wanted to post a quick note about the difference between the valuation of a company and the price that you pay to buy that company.  This distinction came up after a conversation I had the other day with an associate who had difficulty understanding why he was looking at paying a different amount for a company than the valuation his accountants had given to him.

Valuation and price have different meanings and are (usually) two quite different numbers. A company’s valuation is the financial assessment of a business determined by one or more accepted valuation methods, such as Discounted Cash Flow.  Valuation’s main purpose is to figure out a ceiling for what you could pay for the prospect.

The price is the dollar amount that will be negotiated in the acquisition agreement. Remember the core premise that every company is for sale for the right equation. The valuation will certainly form a major part of that equation, but there is no reason to assume it will be all of it.

One of the factors that often must be mitigated is the owner’s ego. For example, your valuation methods may place the value of a company at $35 million, but the owner passionately believes his firm is worth at least $40 million. When constructing your initial offer you may have reason to take into account the owner’s expectation of what he will get for his company.

Other factors that can force a gap between price and value include historic transaction multiples in the industry, revenue replacement issues and even the rumor mill.

I urge you not to throw around the terms price and value synonomously.  As you can see, they are quite distinct. A solid understanding of their differences is essential when discussing dollars and cents during negotiations.

Technorati Tags: acquisitions, Capstone, David Braun, External Growth, M&A, mergers, Mergers and Acquisitions, price, valuation