Before starting M&A negotiations, both buyers and sellers can benefit from setting a “walk-away price.” Consider it a safeguard measure. An amount below (for sellers) or above (for buyers) the walk-away price signals the end of merger negotiations.
For sellers, anything below the walk-away price grossly undervalues the company’s assets and earnings, and suggests that the buyer is simply looking for a bargain and possibly isn’t playing fair. A number above the buyer’s walk-away price indicates that the acquisition no longer makes financial sense to the buyer given expected costs and synergies.
Sellers: Honest assessment
Typically, sellers determine their walk-away price by starting with objective information and an honest self-assessment. To prevent overestimating your business, consider hiring a professional valuator to appraise the company based on current assets and financial statements, as well as projected earnings.
Then discuss the current market with your M&A advisor. An active, high-volume market may suggest you can afford to hold out for a better price, particularly if companies similar to yours have sold above their original asking prices. A sluggish market may mean that you need to lower expectations — and your walk-away price.
The timeframe also influences the walk-away price. If you’re in a hurry to sell — for example, due to poor health or a need to raise cash — you probably can’t afford to set too high a price because you’ll need to accept the first decent offer.
Buyers: Facts on the ground
For their part, buyers need to walk a thin line. Naturally, you’d like to get a “bargain,” but if you really want to make a particular acquisition, underbidding and alienating the business’s owner isn’t the way to do it. If the company is in strong financial condition and is being courted by several buyers, the seller can afford to ignore you.
So make sure your walk-away price addresses facts on the ground. Carefully assess the business’s earnings and assets relative to industry norms. And be realistic about potential deal synergies. Often, buyers base synergy expectations on projected cost savings or revenue increases that never materialize.
Make it work
Whether you’re buying or selling, the walk-away price doesn’t necessarily have to be a doomsday device. There may still be room for discussion if both parties really want to make the deal work. However, if the other party seems unwilling to budge from its position, it needs to respect your decision to walk away.
© 2015