What is My Business Worth

Identifying the “Right Buyer” requires understanding the four main classifications of Buyers.

The Strategic Buyer:  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 economics of scale, new channels of distribution, new technologies or other integration considerations.  To be attractive to a Strategic Buyer, your company should fit most, if not all of the following criteria:

• Sales in excess of $10 million
• Proprietary product or process
• Unique market presence
• Synergistic fit with the buyer
• Suitable management willing to stay 

Private Investment Group/Sophisticated Buyers:  This group of Buyers emerged as a force when the “merger mania” of the late 80’s 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 information 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 investment or holding company

• Revenues from $10 million upwards to $100 million
• Earnings of $1 million
• Investment of considerable cash or equity
• Pay 3 to 10 times EBITDA earnings 

High Net Worth Individuals

• Revenues from $2 million upwards to $20 million
• Expect 6 figure future earnings
• Expect to leverage a part of the purchase
• Expect the Seller to finance part of the buy
• Pay 3 to 7 times EBITDA earnings  

Cash Flow Buyers:  By far the largest group of Buyers.  Cash Flow 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:

• A living wage typically commensurate with the initial investment
• A modest return on the cash investment
• P/E ratios of 1 to 4 times  SDCF
• Seller financing
• A good fit with their skills and the opportunity to make the business better 

Many small businesses are purchased by Cash Flow Buyers.  VR Business Sales maximizes the amount the Financial Buyer is willing to pay finding the right Cash Flow Buyer for your business.

Industry Buyer:  The Industry Buyer is almost 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 other Buyers is the value of goodwill. Industry Buyers won’t pay for it.  The Industry Buyer typically will pay:

• Liquidation value
• Book value
• Adjusted Book Value