Is there really a strategic value that private firms can expect when they decide to sell? If so, how can they estimate the amount?
Strategic value is a real, yet amorphous, concept. It is best defined and quantified by a specific buyer. The most obvious component of strategic values are costs eliminated or reduced as a result of the merged entities, including:
- Centralizing administrative functions
- Removing high salaried, duplicate positions
- Better vendor terms and prices
- Sale of excess facilities
- Lender relationships
- Access to capital
- Improved production processes
In addition, there are other combination effects that are considered part of strategic value. These attributes primarily relate to added and complimentary sources of revenue and better application of intellectual property (IP).
To assess strategic value, the initial step is to estimate the base business value. This base is determined as if the buyer is a typical financial buyer. To the initial business value is added the quantifiable elements of strategic value. These elements must be carefully analyzed by a valuation professional, to avoid duplication or overlapping factors.