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Motives, valuation and pricing: a small sample analysis of small- and medium enterprises in the Netherlands

Woerd, L. te (2011) Motives, valuation and pricing: a small sample analysis of small- and medium enterprises in the Netherlands.

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Abstract:This research is about the difference between valuation and pricing in acquisitions of SMEs. It was performed based on a theoretical framework that includes the three main topics of this research: motives for acquisitions, valuation and pricing. In reality the value of a company is not the same as the transaction price of a company. Several explanations determine the difference between value and price. This research identifies, explains and rates these explanations. The purpose is to clarify the difference and to open the eyes of SMEs in acquisitions. After the identification, these explanations were rated to what extent these explain the difference between valuation and pricing. It is important to reduce the difference, because in that way the price comes closer to the expectations of the emotional buyers and sellers in and valuations will have an added value in that case. This report was performed at the Corporate Finance department of Brouwers in Zwolle (the Netherlands). There is not a lot of research about acquisitions in Small- and Medium Enterprises, but the most are based on publicly traded companies (Nunnally, 2006). That means this research adds interesting insights in the SME area about the topics discussed above. The research question is: What are the explanations for the difference between valuation and pricing of fifteen acquisitions in Small- and Medium Enterprises in the Netherlands? The research is an explanatory study and it uses survey research in a small sample. It focuses on a small sample of fifteen acquisitions in Small- and Medium Enterprises in the Netherlands. The secondary data was collected from scientific books and articles and the primary data was collected through semi-structured face-to-face interviews with owners or financial directors (buyers and sellers) from these fifteen companies. These companies were involved in acquisitions in the last three years and are from different industries and have different sizes. Results: The valuation and pricing start with the motives. Synergy and corporate control are the most important motives for buyers in the sample. Looking at the motives for the sellers in the sample, circumstances that relate to the owners are the motives to sell the company. The explanations for the difference between valuation and pricing could be the choice of valuation methods, the value drivers and the price drivers. These were rated on a Likertscale from 1 to 5 and the scores for each explanation were added. The explanations could be objective or subjective. Objective explanations could be calculated and subjective explanations are not visible and different in different cases. The value estimations (in the value drivers and the valuation methods) and the price drivers are subjective. Synergy is also an explanation for the difference and is very subjective and should be included in the valuation. The DCF method attempts to include synergy into the calculation and the multiples method does not include this. The results are that the acquisition related benefits (synergy) are the most important explanations for the difference between valuation and pricing in the sample. These explanations are followed by the bargaining strengths and the motives for acquisitions, these explanations explain the difference to a large extent. The other explanations in order of rank (interests for acquisitions, presence of advisers, financing acquisitions, trends in economics and politics, risks, others, multiple bidders and choice of valuation methods & valuation errors), explain the difference to a small extent according to the results from the interviews. Not the DCF method, as could be expected from the literature, but the valuation method using multiples was used the most in the fifteen acquisitions. This is an easy and subjective method and less accurate than the DCF method. Buyers and sellers in SMEs prefer to use their feeling and an easy valuation method. If buyers and sellers in SMEs want to reduce the difference between valuation and pricing, they have to use more accurate valuation methods, they have to pay more attention to the valuation and the importance of these valuations has to be recognized by them. In this way more aspects will be included into the valuation and the difference will be smaller. The right value drivers also have to be identified and have to be implemented in the valuation method, otherwise valuation errors could occur. Also the SMEs have to take into account the price drivers, because these could deviate the transaction price from the valuations. Some price drivers (example advisers) could be influenced by the buyers and sellers and some could not (example interests in acquisitions). The explanations which affected the valuation process and the pricing process (acquisition related benefits, trends in economics & politics and risks), should be implemented better in the valuations, so that a smaller gap arises. A difference between the valuation and the transaction price of companies will always remain, because the valuation and pricing are partially objective and partially subjective. Also the difference between buyers and sellers (motives, interests and more) will always remain and the price drivers cannot be easily influenced. Emotions are also important in acquisitions in SMEs, these could influence the price. The buyers and owners should try to switch off their emotions and be more objective. Owners, CFOs and advisers have to accomplish the above to give a good estimation of the price and to limit the emotions of buyers and sellers when there are major differences in value and price. All this is a major goal for the future.
Item Type:Essay (Master)
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:85 business administration, organizational science
Programme:Business Administration MSc (60644)
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