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:
- Sales in excess of $10 million
- Proprietary product or process
- Unique market presence or share
- Synergistic fit with the acquirer
- Suitable management willing to stay
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 Hines & Associates Inc. 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
- Revenues from $10 million upwards to $100 million
- Earnings of $1 million for platform acquisitions
- Earnings of $250k minimum for add on acquisitions
- Investment of considerable cash or equity
- Pay 3 to 6 times earnings
High Net Worth Individuals
- Revenues from $2 million upwards to $20 million
- Looking for a business can expand exponentially
- 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 5 times earnings
Sophisticated Buyers sometimes buy companies for sale 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:
- A living wage typically commensurate with the initial investment
- A modest return on the cash investment, willing to pay 1.5 to 3 times earnings
- SBA or Seller financing
- A good fit with their skills and the opportunity to make the business better
Many small businesses are purchased by Financial Buyers. Hines & Associates Inc. 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:
- 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 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. Hines & Associates Inc. can assist you with a professional business valuation.