How are businesses valued? – Marketplace

This is just one of our “Always Amazed” series of stories, where we answer your questions about the world of business, no matter how big or small. They have never asked whether to recycle worth it? Or how to store brand names overlap Name brands? See more from the series over here.

Listener Stephanie Gilliam from Florence, Alabama, asks:

How are businesses valued? For example, when one company buys another, who decides the price? What does the cost include? I assume the price includes any assets, but what is the price for the brand itself and future profits?

There is no magic equation for assessing a company’s true value. If there is such a thing as a “true value,” it may be much higher or lower than the company’s selling price.

“It’s more art than science. Brian Quinn, a professor at Boston College Law School, said it would be nice if there was a formula that you could just plug in and be sure that’s how a business is valued. But you’ll find that anyone takes many approaches and makes many assumptions about the future when valuing a business. Then they draw a line in the sand and that’s where they stand.

Financial experts say these valuations are tied to whether the company is publicly traded or privately held.

Publicly traded companies

When it comes to publicly traded companies, the value starts with the stock price, which is determined by the buyer and seller of the stock each day, Quinn explained. The stock price multiplied by the number of shares outstanding determines the company’s value at any given time, and the trading process causes the price to fluctuate.

The stock price tells you how the market characterizes that company. But to convince the company’s managers and major shareholders to sell to the buyer, the buyer typically has to offer what’s called a takeover premium above the market price.

“This will basically be the beginning of negotiations,” Quinn said. “And the negotiation really boils down to: ‘The market says your company is worth X. How much more than X do I have to pay to give up what you think the company is worth?’

Twitter Subject: “Elon Math”

Elon Musk’s attempt to acquire Twitter was one of the high-profile business deals of the past year. He initially offered to buy the company for $54.20 in a $44 billion deal. Since then, Twitter has been trying to renege on the deal, saying it didn’t provide enough information about the number of spam and fake accounts.

The stock closed at $38 a share a few weeks before Twitter announced the deal.

According to Quinn, Musk likely settled on that price because it could be his banks or himself: What number above Twitter’s current stock price does Twitter say yes and end at 420? (A weed joke, in other words.)

“My guess is that’s basically how he came up with that number,” he said. Because if they were given 42, they would say, ‘We are trading at 38, this is not enough.’ The next increase in Elon Musk’s bill is $54.20.

And since Twitter was trading above $70 at some points last year, the company may be asking itself: “‘Given our view of the future, what are the chances that it will trade at $70 again in the next few years?’ ” Quinn said. “And they’ve probably come to the conclusion that the prospect is low.”

Arriving at this stock price “was the opposite of science,” Quinn said. This is just an increase in Elon’s account.

Private-equity buyers

Each type of buyer will have a different approach. According to Quinn, private equity buyers try to figure out how much debt they should take on when considering how much they’re worth. PE firms focus on taking investment stakes in public companies or often buying them outright.

“They’re very focused on paying back the debt because they don’t want to pay the company too much and get into a situation where the company doesn’t generate enough revenue to pay off the debt.” he said. “So if you look at private equity in general, the buyers out there don’t generate very negative reviews because they’re very tied to their model and their financial needs.”

Although very low interest rates for most of the decade allowed private equity buyers to pay higher prices, as interest rates continue to rise, Quinn expects PE players to keep a tighter grip on their checkbooks, he said.

Private companies

With private companies, there is no share price, which makes it more difficult to assess their value.

According to Brian Price, president and CEO, the purchase price of a private company is based on key drivers such as the historical profitability of the business, the industry and market the company is in, and the company’s ability to predict future earnings growth. Chief Officer of Mesirow Investment Banking. Intangibles like a company’s image and brand are a big part of its success.

Price added that generally private companies market themselves to mystery shoppers. If the owners are interested in selling, they may have value, but whether or not they meet that value is a market issue, he explained.

Sometimes a private company is worth more than its sales price. Take Instagram, which Facebook bought in 2012, Quinn said.

“When Facebook bought Instagram for $1 billion, Instagram had 11 employees and no profit,” he pointed out.

However, Instagram founder Kevin Systrom asked Facebook’s Mark Zuckerberg for $2 billion in a deal. But Zuckerberg was able to seal the deal by reducing the amount to $1 billion.

Six years later, Instagram is valued at more than $100 billion as an integral part of the world’s largest social media company.