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Mar 10, 201610:17 AMOpen Mic

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What's your company worth?

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One very public example of a buyer paying much more than the theoretical value of a business is when Steve Ballmer, the former CEO of Microsoft, bought the Los Angeles Clippers professional basketball team in August 2014. In January 2014, Forbes published an article estimating the value of the team to be $575 million, yet Ballmer paid $2 billion for the team months later.

The acquisition price defied all logic and theoretical valuations for the company, but Ballmer’s perspective is quite different than that of most others. He had just finished a career at Microsoft where he was used to paying very high multiples for acquisitions of technology companies with no earnings and significant risks, and thus saw an acquisition of a profitable NBA franchise as a relatively riskless investment. Additionally, he had a net worth $21 billion at the time and really wanted to own an NBA franchise, so securing the deal was much more important to him than paying a reasonable valuation.

There are all sorts of factors that enter into the logic of potential buyers that do not follow the norms of theoretical finance and valuation techniques, and therefore are difficult for sellers to uncover. The best way to discover what buyers are willing to pay for a company is to sell the company using a process that presents the opportunity to multiple buyers at the same time and conducts a competitive bidding process. This creates a market for companies and reveals the maximum price a buyer is willing to pay for a company at that time. Investment bankers can help business owners attract potential buyers, run the sale process, and negotiate the terms of the sale.

Steven G. Sprindis, CFA, is managing director for Waypoint Private Capital Inc.

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