From the monthly archives: December 2010

We are pleased to present below all posts archived in 'December 2010'. If you still can't find what you are looking for, try using the search box.

Value Driver #9: Barriers to Competitive Entry (Business Moat)

Circumstances that give a business an advantage over its competitors, strengthen its strategic position, or can be leveraged for future gain boosts business value. Why? Because it increases the probability of the continued future profitability of the business and decreases perceived risk by prospective buyers. As with all value drivers, it’s all about risk. Lower risk achieves higher value. Buyers will pay a premium price for a business that has barriers to competitive entry. One way to describe this Barrier Value Driver is to use Warren Buffet's term, "Business Moat." Buffet compares a castle's moat to the protection that a business needs to ward off encroaching competitors. For instance, the wider the moat, the more easily a castle can be defended. A narrow moat does not offer much protection and allows a castle to be breached. To Buffett, the castle is the business and the moat is the barrier that protects its competitive edge. The wider the moat, the longer you can protect your profits. Und ...

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Earnouts - How and Why are They Used in a Business Acquisition?

An earnout is a type of payment agreement which is sometimes used in a business acquisition. Under an earnout agreement, the seller receives part of the purchase price up front, and additional funds over time. The terms of the earnout are written into the sales contract. An earnout can be used for different reasons: To tie the acquisition payout to future performance An earnout, in a business acquisition context, is an arrangement in which the buyer doesn't pay the entire purchase price up front but agrees to pay a certain amount now and more later depending on how well the business performs in the future. To bridge the pricing gap If there is a valuation gap between the buyer and seller, and there always is, it is a way to bridge the gap. The seller may be placing a heavier emphasis on the company's projections, and the buyer placing most of the company's value on its present and past performance. An earnout agreement is a useful tool to get the deal done. In an uncertain economic climate, the ...

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