Business Takeover: The Value And The Price

The value and the price of a business are two distinct concepts that often lead to confusion in the minds of buyers and sellers. A number of “great thinkers” have looked at these two concepts, and their quotes give us food for thought.

Let Us Quote In Four: 

– “There is no absolute value in this world. You can only estimate what one thing is worth to you. Charles Dudley Warner

– “The price is what you pay; value is what you get ”Warren Buffet

– “A cynic is someone who knows the price of everything and the value of nothing” Oscar Wilde

– “The value is calculated, the price is noted” Anonymous

In mathematical terms, we could say that price is a first derivative of value. As CD Warner points out, price is value for yourself. Indeed, a “strategic buyer” (competitor, investment fund, group) will analyze a target in terms of synergies, economies of scale and strategic interest. This buyer will then be able to offer a price much higher than that offered by an individual buyer who will base his calculations on the intrinsic value of the target alone. In this sense, the price corresponds to the perceived value.

The price is also, and above all, the result of a negotiation. The law of supply and demand, competitive intensity, the nature of potential buyers are all elements that participate in setting the price on an amount. Thus, “intermediated” files are subject to a real price escalation, since the commissioned firm organizes the competition on the file by listing a large number of potential buyers to maximize the transaction value on which it is remunerated. In this sense, the price corresponds to the negotiated value.

For financiers, the price is somewhat like a second derivative, the result of the perceived value of the target combined with the potential added value of the buyer.

Beyond these attempts at mathematical comparisons, price appears above all as a fundamentally subjective notion, far removed from “5 times EBIT”. EBIT is the abbreviation for “Earnings before interest and taxes”. This abbreviation corresponds to the operating result (REX) in French accounting, that is to say the profit before deduction of charges, interest income and taxes. EBIT includes net sales from which are subtracted the operating expenses appearing in the class 6 account (salaries, general expenses, energy, charges, etc.). It is better to seek sound advice from the experts. Correctly carrying out the financial valuation of a company involves mastering several accounting and financial techniques, After you have estimated the value of the desired business, negotiation of the sale price with the transferor can begin.

Ultimately, it is the negotiations that determine the final sale price of a business, valuation being only a way to get a coherent idea of ​​the value of the business and to set a limit of supply.

The sale price of a business can change when several potential buyers compete to take it over. Buyers are ready to increase their offer in order to prevent a competitor from getting ahead of them. The value is therefore in a few words very difficult to define and above all does not require to be approximate.

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How To Calculate Depreciation

Depreciation is an accounting concept. It makes it possible to take into account that an object loses value over time (for example because of its wear or its immobilization). Depreciation allows a deduction from taxable profit because the replacement will have to be taken into account.

For an asset to be depreciable, it must meet conditions.

The Three Conditions

Three Conditions Are Necessary For A Good To Be Considered As Depreciable:

That it can depreciate by wear or time

  • That it is durable in the company (whether it is a tangible fixed asset) or intangible)
  • Whether they are recorded on the assets side of the balance sheet

What Are Depreciable Items?

  • Intangible

fixed assets : establishment costs (over 5 years), research costs (over 5 years) and patents, licenses (over 5 years) • Tangible fixed assets : constructions (20 to 50 years), fixtures or fittings (10 to 20 years), technical installations (5 to 10 years), transport equipment (4 to 5 years), office equipment or furniture (5 to 10 years), microcomputers (3 years)

What Are The Non-Depreciable Items?

  • Intangible

Fixed Assets : business, lease rights, brands • Tangible fixed assets : land and works

The Duration Or Rate Of Amortization

The normal duration depends on the use of the asset. The asset can be depreciated more quickly if special operating conditions are present or in an exceptional manner.

The rate is normally calculated from the gross acquisition value of the asset (or contribution).

The Two Depreciation Methods

  • Straight-Line Depreciation

This Depreciation Method Is Compulsory For Certain Goods:

 – goods whose normal useful life is less than three years.

– second-hand goods

– goods not eligible for declining balance depreciation

It can also apply to all other goods

This method is relatively simple, since it is a question of saying that the good depreciates constantly. The amount of depreciation is therefore based on the number of years.

So if a property costs 20 000 and that the asset is depreciated over 5 years, the amortization will be 4000 euros (20,000 / 5) year

Warning: if the property is acquired during the year should be deducted the fraction of the year consumed on the first depreciation

  • Declining Balance

This Type Of Depreciation Is Reserved For Certain Goods:

 – New goods

– Goods of at least three years

– Belonging to one of the categories defined in the general tax code.

This system consists in considering that the depreciation of the good is stronger in the first years. Depreciation will therefore be greater in the first years.

This Involves Applying A Coefficient Which Varies According To The Normal Duration Of Use:

– If the normal duration of use is equal to 3 or 4 years: 1.25

– If the normal duration of use is equal to 5 or 6 years: 1.75

– If the normal duration of use is greater than 6 years: 2.25

Let’s take an example to explain the calculation method: a good that costs 10,000 euros and has a normal duration is always 5 years

The straight-line depreciation rate is 10,000 / 5 = 2,000 or 2,000 / 10,000 = 20%

The declining depreciation rate will then be: 20 X 1.75 = 35%

The first year if the property is acquired on January 1, then the annuity will be € 3,500

The following years: the depreciation is calculated on the basis of residual value either for example for the second year: 10 000 – 3500 = 6500 €

the annuity will be equal to 6500 x 35% = € 2275

summarizing, the rate obtained, said “steady rate” (here 35%) applies:

– the first year on the original value of the property

– the following years on the residual (remaining) value of the property.

Finally, if the declining amortization annuity <the residual value / the number of years remaining, then the company can report an amortization equal to these last annuities.

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