Factors That Influence Price Negotiations

Using the Market Valuation and the seller's asking price as a starting point, there are some factors that influence negotiated purchase price. These factors include:

• Types of buyers - Not all buyers are created equal. Buyers have different acquisition objectives, growth and competitive pressures, availability of capital and the attendant costs, risk tolerance and adeptness at negotiating deals that impact the amount they might pay for a given company at a given time.
• Financial Parameters - From the buyer’s side, the financial parameters that determine what can be paid for the company include Internal cash available for investment in acquisitions, the amount they are willing to invest in a single deal, The cost of capital, the availability of capital and the terms under which it is available, the reaction of the capital markets to the proposed acquisition.
• Attractiveness of the Company - Naturally, an asking price that is below market valuations is going to make a company more attractive. Factors that make a company attractive include Quality of earnings, Growth rate higher than industry norms, a strong balance sheet, Capacity to support additional debt, Leadership or dominance in the market, Strong management.
• Relative Negotiation Skill - As a buyer, the premium you will need to pay will be influenced by your negotiating skills, bargaining leverage and time constraints. In negotiation, power is derived from your perceived ability to fulfill needs. The buyer offers the seller liquidity, personal freedom or the opportunity to further develop the company. The seller offers the perceived economic advantages of owning the company.
• Buyer's Experience - Experience within the industry reduces the downward pressure on the premium. The buyer’s prior experience provides him with an understanding of the relative value of companies in the industry and the drivers that influence value. A deeper understanding of the strengths and weaknesses of the company and how it compares to others in the industry.
• Inherent Risk Factors - When it comes to the risk of acquisition pricing, there are two key principles, the lower the inherent risks of owning the company, the higher the premium a buyer might pay and the higher the premium paid, the greater the risk.
• Market and Economic Conditions - Economic and market conditions strongly influence the buying decisions of both corporate decision makers and consumers. While favorable economic condition encourage higher premiums, it’s important to recognize that such conditions are usually temporary.