How Much Is Your Business Worth? It depends upon the Buyer.
The first step in placing a value on your business is identifying the "Right Buyer." The range of values that different Buyers may be willing to pay is staggering. Buyers pay for opportunity. The Buyer who perceives the greatest opportunity is the Buyer willing to pay the most for your business.
Identifying the "Right Buyer" requires understanding the four main classifications of Buyers.
The Strategic Acquirer. These are the very best Buyers. They almost always pay cash and buy at a premium. Typically public or very large private companies, their decision to buy usually revolves around considerations of economies of scale, new channels of distribution, new technologies or other integration considerations. To be attractive to a Strategic Acquirer, your company should fit most, if not all, of the following criteria:
Sometimes a business that does not meet these criteria can be the target of a "strategic acquirer." A good example might be a small business that an acquirer believes could be franchised or expanded into a chain of similar locations. At VR we look for every reason that may make your business attractive to a strategic Buyer.
Sophisticated Buyers. This group of Buyers emerged as a force when the "merger mania" of the late '80s ended and Buyers began to recognize the opportunities in the private sector. Lower interest rates have also spurred the growth of these Buyers by encouraging the formation of investment groups whose purchases are made using a "schooled" approach. There are two distinct types of Sophisticated Acquirers and the acquisition criteria they use are as follows:
Private Equity Group
High Net Worth Individuals
Sophisticated Buyers sometimes buy companies smaller than the outlined criteria. A good example of a business attractive to the sophisticated Buyer is a light manufacturing business expandable into multiple markets through expanded marketing and solid management.
Main Street Buyer. By far the largest group of Buyers, Main Street Buyers are the most common Buyer for Main Street and Upper Main Street businesses. These Buyers tend to focus solely on present and past earnings and will not typically pay a price based on future earnings. The Financial Buyer is buying a job, and will consider a price fair if the transaction meets the following criteria:
Many small businesses are purchased by Financial Buyers. VR maximizes the amount the Financial Buyer is willing to pay by finding the right Financial Buyer for your business.
Industry Buyer. Unless they are doing a consolidation or roll up in their industry, this Buyer is almost always the Buyer of last resort. If you have to sell, the Industry Buyer is usually the only Buyer you will attract. The difference between the Industry Buyer and all others Buyers is the value of goodwill: Most of the time Industry Buyers won't pay for it. The Industry Buyer typically will pay:
All too often business owners who are attempting to sell their business on their own say, "Why not? I know everybody in the industry." Unfortunately, many times, a sale to the industry Buyer means a deeply discounted sale.
The first step in selling your business is understanding what it is worth. VR Business Brokers can assist you with a professional business valuation.
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