The term “special purchaser” is often used when it comes to valuing businesses, but what does it mean and how does it affect the value of a business?

Business valuations

Forensic accountants are regularly instructed to value businesses as part of family or civil proceedings when the parties are unable to agree what their interests are worth. Forensic accountants can then be instructed to opine on that business’s “market value”.

In such instructions, there is generally no ready market for the business or its shares and often there have been no recent transactions which could assist in ascribing a value.

So what is “market value”?

“Market value” is defined by the International Valuation Standards (“IVS”) as:

“The estimated value for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties have each acted knowledgeably and without compulsion.”

Therefore, forensic accountants assume a hypothetical world in which the hypothetical purchasers are reasonable and prudent and have informed themselves as to all relevant facts including the business’s present position and its future prospects. 

Despite valuations being based on this overriding assumption, there may exist a potential purchaser to whom the business has extra value. In broad terms such purchasers are deemed to be “special” and may be classed under the following headings identified in the IVS:

1. Ownership rights
   In certain scenarios, the sale of shares by one shareholder to another could lead to that shareholder to have greater voting rights and/or entitlement to dividends and capital. This is particularly important when the share transfer results in one shareholder becoming the owner of more than 75% of the shares so has absolute controlling interest or over 50% and obtains a controlling interest. 
2. Business information
   Market value relies on the buyer and the seller having access to the same information. However, those running the business will always have more knowledge of its operations than any prospective purchaser or valuer. Whilst it is not unusual for business owners to paint a picture of doom and gloom, this is generally only half the story.
3. Economic and industry considerations
   A company in the same industry may see synergies in buying the business being valued or its purchase may provide access to intellectual property or it may eliminate a competitor.
4. Operating and non-operating assets
   Someone may wish to buy the business simply to acquire a specific asset, such as a piece of land or specialised machinery or for its employees or a specific contract. 

In each of the above scenarios, a hypothetical purchaser may be willing to increase its offer for the business above the calculated “market value”. This uplift is the special purchaser’s premium but should it be incorporated in the market value?

Use of a forensic accountant

As expert valuers, we typically opine on a market value as defined by the IVS above. We are reliant on the financial and other information provided by the business owner(s) and the parties but this may be incomplete through no fault of their own.

Are we required to consider special purchasers? Yes, to some extent. 

1. We need to consider whether the sale of an individual’s shares would indeed mean that another shareholder obtained an advantage in terms of control. This is done by looking at the value of individual shareholdings after the application of the relevant minority interest discount before and after the transfer of the shares in question.
2. We undertake market research to determine prices paid for special purchasers comprising companies in the same industry. For example, there have been so called consolidators in many industries who pay above market rates to gain market share and so boost their own value in that manner.
3. We also consider whether any of the assets owned by the business might have a value to a special purchaser that exceeds its market value, for example, property.

So, if in doubt about the possible impact of a special purchaser on a valuation, maybe consider including that in your instructions?