A time to sow and a time to reap.

While farming is dictated by the weather, the stock market fluctuates to sentiment.

The general public often price the stocks poorly, thus the volatilities in some stocks.

Often the pricing is about right, at certain times, it is definitely wrong.

Thus the importance of distinguishing price from value.

It is better to be approximately right than be absolutely wrong.

At a certain price, a stock is a bargain.

When you buy a stock, do not expect to buy at the bottom.

Be prepared to see the stock price goes lower than your buying price in the short term.

Your goal is in the long term, the price should be higher than your buying price.

Similarly, when selling a stock for good reasons, do not expect to sell at the very top.

Be prepared to see the stock price going up further after you sell.

In the long term, if your reasoning is correct, the price should be lower than your selling price.

Under this circumstance, the buyer's regret of not buying at the lowest price is irrational.

Under this circumstance, the seller's remorse of not selling at the highest price is irrational.

Through understanding these, you will be a better and rational investor.

How does a business transfer agent go about valuing a business?

 

How does a business transfer agent go about valuing a business?

Leading business transfer agents discuss the myriad issues surrounding business valuation:

• such as the various causes of overvaluation,
• how the same business can be given significantly different values by different agents, and
• how the urgency with which you need a sale is often pivotal to the price you achieve.

Don Glossop, Andon Frères
"The valuation of companies is not a precise science, it's a complex process based on an array of different information that can be subject to change. It's not like valuing a residential property, where you can rely on similar properties in the area and make adjustments based on numbers of bedrooms, a single or double garage or an en-suite bathroom, etc.

 

"All companies are different, their valuations are subjective, and there are many factors that can affect a company's value. These include tangible factors such as profitability – historic, current and forecast – the extent of contracted income or recurring revenues, the strength of the balance sheet – net asset value – etc.

 

"Intangible factors also need to be considered, for example the company's reputation, longevity and track record, the quality of its products and services, its customer base, any dependence on particular customers, its management, the market it operates in – for example, an emerging market with high growth prospects or a mature market likely to decline in future years – threats and risks to the business, and so on.

 

"The buyer's circumstances might also affect potential value. In general, there are three types of buyer.

 

• "Management, individuals with experience looking to buy their own business, typically don't have the funds to buy a business outright and have to borrow to raise the asking price, in which case servicing the debt has to be factored into their calculations of value.
• "Then there are corporate buyers, not in the same industry, but in, say, an adjacent, complementary sector, looking for diversification, that can see benefits from such an acquisition and might be prepared to pay a premium.
• "Finally, there are trade buyers – ie, competitors – who work in the same sector, have similar or larger operations and can see synergies and potential economies of scale, which again might make them be prepared to pay a premium.

 

"Having said this, it should be remembered that a buyer wants to buy as cheaply as possible. An analogy is the sale of painting or piece of pottery at an antiques auction – the bidding starts low but can rise substantially depending on how badly the bidder wants to complete the purchase.

 

"It's fair to say that most vendors tend to overvalue their businesses and unfortunately, some brokers overvalue businesses because that's what the vendor wants to hear and to improve their prospects of securing the business. Vendors should remember that a broker has nothing to gain by putting forward a low valuation; it's likely to be an honest appraisal based on information provided and his experience in the marketplace.

 

"They should also remember that the broker doesn't determine valuation. This is determined by what a buyer is prepared to pay and what a vendor is prepared to accept, and without agreement by both parties, there will be no deal.

 

"The vendor should be aware of high valuations accompanied by high fees that are not related to the sale of the business."

 

Derek Burgoyne, Cornerstone Business Agents
"The sad truth is that of the many thousands of businesses currently on the market the majority are set at an extremely optimistic asking price – to put it mildly.

 

"Why is this? The reason is usually one (or more) of the following:

 

•This is the price the business owner would like to achieve and no one has put him/her right. Even if good advice is given, it is often ignored
•This is the price the business owner needs to achieve – to cover loans, pay the agents, banks and other creditors
•An agent with little experience has suggested the price (the less experience and confidence an agent has in his/her ability to value a business the more likely he is to overvalue to please the client)
•An agent suggests the price as a way of gaining the instruction as a sole selling agent. This enables them to get a large up-front fee or to make it more likely that he/she is instructed ahead of a competitor (with the intention of going back to the client after a period of time to suggest lowering the price if no interest has been generated)
•There is a lack of financial information supplied to the agent, who then has to value on verbal indications of turnover and profitability. As most owners usually overestimate their turnover and profitability, the business is overvalued
"To ensure a business is valued accurately I would suggest the following: invite two or three agents to value the business and ask for an explanation each time of how the value was calculated. The explanation should include examples of similar businesses recently sold – or on the market at least – and what adjustments and multipliers have been applied to the net profit to value the goodwill of the business.

 

"Advice should also be given on how the value could be increased. What improvements would have to be made to the property, should the lease be extended, what financial information should be provided, etc."

 

Shaun Sweeney, Turner Butler
"Anyone can give a business away. Some business transfer agencies find it simple to go in with what I would call an extremely reasonable valuation, and effectively give the business away.

 

"A client may have spent 35 years building the business up, and have a long-term view of the sale – in other words, he may have three years to sell it and prefer a more dedicated agent who would achieve a substantially higher value.

 

"So every business and every client is different when it comes to valuations. If a seller wants to sell within a week, he'll have a different valuation to one with long-term view of selling.

 

"Some business transfer agencies are accused of overvaluing to get advance fees. But I think sometimes, they’re reflecting what the client wants rather than the market valuation.

 

"I'd say that valuation and overvaluation depends on many factors. If your client wants a quick sale, the asking price may be lower than a well prepared, well presented sale.

 

"You should never knock another agent for overvaluing, because he might have seen something in the business that others haven't.

 

"We get lovely letters from our clients, and one recurring theme is that we got more for their business than they expected.

 

"We sold one restaurant for £1m. Their testimonial said: "We've been on the market for two years with other agents, and despite taking a fee in advance, failed to sell the restaurant.

 

"You valued our business at £150k more than our previous agent and sold for an even higher price. Only you could sell a restaurant in England, to Australians living in America, for a Frenchman married to a Polish wife."

 

"People could say we overvalued that, but he wasn’t desperate to sell, and we saw the potential in the business, where maybe another agent just saw it as just another business."

 

David Rhodes, Horizon Business Agents
"I'd say it's a simple thing to value a business – there are well known criteria. I'm aware that certain agents ignore this and effectively overvalue to gain instruction, not to sell the business.

 

"The fact is, these agents know what's on their books and they know what they're selling. If they're valuing at a certain figure and they're not selling them then it must surely show that they're overvalued.

 

"I tell the client what I think the market will bear. There have been times where a buyer pays more than I advised the client it was worth, but 95% of the time I'm about right.

 

"It's up to the agent whether they take on an instruction at the figure the seller wishes to market at. Ultimately, you're the expert, not the seller.

 

"If you're the one telling them that it's worth 'X amount', you should be able to stand by that valuation.

 

"Sometimes people don't like the truth. Overvaluations often happen because the vendor gets greedy.

 

"A number of times vendors have told me that they knew their business wasn't worth the figure they'd asked, but they thought they'd give it a try anyway.

 

"Then there are owners who need a certain amount of money to get out of trouble. One told me last week that if he couldn't get a certain price for his business then there was no point in selling it, as he couldn't pay off his debts otherwise, in which case he rather go bankrupt. Others simply want to get their original investment back."

 

Rupert Cattell, Amberglobe
"Overvaluations are usually caused by salesmen who have been given very aggressive targets by their employers and are required to get a large up-front fee to meet those targets.

 

"Be wary if a valuation is significantly in excess of everyone else's valuation, if a lack of understanding of the sector is apparent, and if they have an impractical view on how quickly the business will sell. Vendors get told by some people that they can sell a business within six weeks – which is just nonsense."

 

Norman Younger, Kensington Business Brokers
"Two things spring to mind. First, when the vendor has a particularly good business and believes it's worth above and beyond its true value, and they can hold that view so strongly that the buyers believe the hype. It's like houses, when people put crazy prices on them and people pay it because they're scared of getting left behind.

 

"Then of course you get a buyer who doesn't do his homework properly and doesn't want to follow the advice of his agent.

 

"Or it could be that someone has a particular reason for wanting that particular type of business or location, so to them it's worth more than to most people. That would be an overpayment in terms of market value, but not from their point of view.

 

"But some people might look at how much a buyer paid for 'X' business to determine the price of another business, not realising the misleading reasoning behind the valuation."

 

 

http://www.businesstransferagents.co.uk/info/articles/how-does-a-business-transfer-agent-value-a-business.aspx

Welcome to a buyer's market without buyers

Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
Article
Video

The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.

Advantage Goes to the Individual Investor

Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)

Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.

Welcome to a buyer's market without buyers.

This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.

Corporate bonds.

A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.

Municipal bonds.

The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.

Emerging markets.

Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.

TIPS.

Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.

Closed-end funds.

These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.

Real estate.

REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.

Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.