Further to our previous blog, Who Are Special Interest Purchasers?, this week we are going to discuss how special interest purchasers can influence the fair market value determined in a business valuation.
In valuation engagements, we must consider if there are any potential special purchasers that exist because they can impact the price paid for a company. Special purchasers exist when they are willing to pay a premium for a business to take advantage of economies of scale, synergies or competitive advantage. Special purchasers are normally competitors, customers or suppliers that might gain particular advantages from ownership, not applicable to ordinary purchasers.
The fair market value of a company determined in a business valuation is a notional value (i.e., a value determined in absence of any open market negotiations), and identifying special purchasers can be a challenge and not as straightforward as one would think. Typically, the owner of a business should be able to identify some potential special purchasers; however, even when special purchasers are identified, there is still a level of finesse and difficulty in quantifying the premium amount these special purchasers are willing to pay.
Where a class of special purchasers exists, special purchaser prices may represent the fair market value of a company. Special purchasers, such as much larger public and private companies, may pay the highest price for a company.