How much is my company worth? It depends.
The price you can expect when you sell your business will be impacted by many factors. One of those factors is the type of buyer you attract. Each type of buyer has their own basis for valuing your business. The buyer will be willing to pay more or less based on how you fit their needs. For a look at some of the different types of buyers in the market for sellers and what they value, let’s looks at Strategic, Financial, Combination and Related Buyers.
Strategic buyers include competitors, vendors and customers who want to buy your company because it adds to theirs in a synergistic way. The synergies might be due to customer relationships, greater market share, intellectual property, employees, etc. A strategic buyer will often already have a back office in place and won’t need to add yours to run the business going forward. Value is based on your business’ potential synergies with theirs. While buyers will typically say “we won’t pay for synergies” there is often room to improve the price based on synergies. We often look at these opportunities from a “bolt-on” perspective for the buyers to assess the value. A bolt-on scenario eliminates duplications, unnecessary expenses, vehicles and other redundancies to estimate the new business’ financials.
Financial buyers include private equity groups, angel investors, family offices, venture capital funds and individuals who are interested in buying the cash flow from your business. They may want to buy your company to establish their base of operations. A financial buyer will want the seller to have a solid management team in place and a well-run back office. “Fixer-uppers” are not usually the target for financial buyers. Value is based on the future cash flows of the business. The financial buyer will base those projected future cash flows on historical cash flows (and discounted to present value.)
Combination buyers include private equity groups looking for addons, consolidators, and companies doing a roll-up. These buyers want both the increased market share that the strategic buyer wants together with the strong cash-flow that can be enhanced with shared operating systems, better technology, or better relationships with potential customers. Value is based, like financial buyers, primarily on the cash flows, with some slight premium for synergies.
Related buyers include management, family members and partner buy-ins and buy-outs. These are the people who are familiar with the business and want the operation to continue with the related cash flows. In this case, they usually don’t want or need the owner. Value will be based on a number close to the financial buyer’s value.
Of course, every buyer has their own set of circumstances and how the seller’s company fits with the buyer’s is based on the value drivers of both businesses. The better the seller understands his/her own business’ strengths and weaknesses, the better the price.
If you’d like to talk about selling your company or buying one, please email me at [email protected] or call me at 224-688-8838. We’re here to help you harvest your potential!