Agree or disagree: on the role of negotiations for the valuation of business enterprises

Florian Follert, Jeffrey M. Herbener, Michael Olbrich and David J. Rapp ()
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Florian Follert: IWP - Institut für Wirtschaftsprüfung (Universität des Saarlandes - Saarland University)
Jeffrey M. Herbener: GCC - Grove City College (.)
Michael Olbrich: IWP - Institut für Wirtschaftsprüfung (Universität des Saarlandes - Saarland University)
David J. Rapp: IWP - Institut für Wirtschaftsprüfung (Universität des Saarlandes - Saarland University)

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Abstract: As Mises pointed out, in the division of labor economizing valuations require an appraisement of the structure of market prices of goods beforehand. While this insight holds true for each and every good, investment decisions, e.g., concerning the purchase of an entire business enterprise, necessitate considerations beyond appraisement. As Herbener and Rapp (2016) illustrated, an economizing valuation of businesses must be based upon both appraisement and a genuine investment appraisal which provides the valuing person with the marginal price he can barely accept. However, even though the computation of this marginal price is an obligatory step towards an economizing investment decision, it is still not sufficient solely. In contrast to the purchase of a consumer good in which the asking price is known a priori and can be compared to the benefits of the good concerned by the valuing person directly, in case of the purchase of businesses, the price to be paid is unknown a priori; it is rather the outcome of a negotiation. Therefore, an economizing valuation of firms not only requires both appraisement and investment appraisal but also a negotiation of the final price to be paid. Since the corresponding negotiation process must be characterized as a terra incognita in Austrian economics, consequently, this paper investigates the negotiation between the involved parties as the final step towards their economizing valuations in depth and deduces guidance for an appropriate negotiation.

Date: 2017-03-10
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Published in AERC 2017 : Austrian Economics Research Conference, Mar 2017, Auburn, Alabama, United States

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