As great economists always say…It depends…
When placing a value on your business you must identify the "Right Buyer." The range of values that different buyers may be willing to pay are 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 Buyer
These are some of your best possible buyers. They almost always pay cash and typically buy at a premium. With 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 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.
Sometimes a business that does not meet these criteria can be the target of a "strategic buyer." 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 Business Brokers, we look for every reason that your business might be made attractive to the strategic buyer.
Private Investment Group/Sophisticated Buyers
This group emerged during the "merger mania"" of the late 80’s. 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.
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.
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 business.
- Pay 3 to 7 times EBITDA earnings.
Sophisticated buyers sometimes buy companies smaller than the outlined criteria. A good example of a business attractive to the sophisticated buyer is quick printing, a light manufacturing business expandable into multiple locations through good marketing and solid management.
Cash Flow Buyer
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 commensurates 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 Brokers maximizes the amount the financial buyer is willing to pay by finding the right cash flow buyer for your business.
The industry 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 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.
All too often business owners who are attempting to sell their business on their own say, "Why not? I knew everybody in the industry." Unfortunately, 99 out of 100 times, a sale to an industry buyer means a deeply discounted sale.