A deal and contractual provisions
A deal, in simple terms, can be described as an agreement entered into by two or more people or parties establishing a business arrangement for mutual financial gain. The parties can be natural or juristic people. A deal agreement normally addresses aspects such as the parties, their capacity to act, consensus, offer and acceptance, goods or services to be transacted, consideration or price, payment terms, transfer of ownership, breach, dispute resolution, termination, etc.
Determining price
This article seeks to give some insights into how parties may determine the contractual purchase consideration or price. In most cases this is the deal maker or breaker. Two perspectives are taken, the seller’s asking price or the purchaser’s offer price. Below are some pointers on how prices, with or without taxes, may be determined.
Market prices
Parties may be familiar with publicly available market prices for similar or comparable goods or services such as properties, motor vehicles, agricultural produce, groceries or leased properties, etc.
Use of professionals
Even where market prices are available it may still be advisable to engage professionals or experienced traders who may be specialists in certain markets, goods or services. This practice is used in properties, second hand machinery, etc.
Where market values are unavailable it is advisable to use such professionals or experienced traders or suppliers. For example asset valuers are used for valuing second hand assets targeted for purchase. Accountants may be hired to value companies in acquisitions or mergers. Business valuations can be complex as there can be many factors to consider such as future viability. The valuation method used depends on the circumstances and purpose of the valuation.
Pricing joint ventures
For one to agree to participate in a joint venture there usually has to be projections of the financial gain or benefits, usually in the form of future cashflows. This will influence the extent of one’s involvement e.g. capital contribution, skills and time to be invested.
Other pricing methods for goods and service
Some suppliers use methods such as cost plus mark up, replacement cost, inflation indexed prices if allowed at law.
Services
These may be determined by multiplying hours worked or to be worked, by an internally derived charge out rate. The internal charge out rate normally covers costs plus profit.
Regulated prices
Where prices are controlled a supplier is expected to use the regulated prices or tariffs.
Quotations and tenders
A procuring entity may use:
- Three quotations for the same product or service from different suppliers,
- Tenders which may vary from simple to complex ones. For Government related business one needs to familiarise with the requirements of the Procurement Regulatory Authority of Zimbabwe (“PRAZ”) and the Public Procurement and Disposal of Public Assets Act (Chapter 22:23). PRAZ has done considerable work to improve procurement.
Auctions
Some prices are established through the auction system, for example repossessed assets in a debt dispute.
Negotiation
Where possible negotiate the price. Consider factors and leverage relevant to your situation e.g. demand and supply forces, market liquidity, competition, substitutes, etc. Negotiation is a skill.
Godknows Hofisi is a legal practitioner, chartered accountant and business rescue practitioner. He is a consultant in deal structuring, business valuations and tax. He writes in his personal capacity and can be contacted on +263 772 246 900 or gohofisi@gmail.com
