If your business is not special, if it’s not unique, you will be behind the eight ball when it comes to getting a good offer to purchase.
Chances are, if your business falls into this category, any offer you get may not reflect the actual value of your business – what it’s truly worth. This is reinforced by most professional advisors and brokers as they provide a valuation of your business based on what profit you are generating now and what your likely revenue and profit growth will be in the future — in other words, some meager multiple of EBIT (Earnings Before Tax and Interest).
And yet many businesses have some untapped potential — and if this can be leveraged by a larger company, you can get a strategic sale value. To be able to identify a potential strategic buyer, the asset or capability of the business must be uncovered or developed.
I’ll talk more about these competitive advantages in another post, but, for now, just remember the things that currently provide your competitive advantage may be well-known to you, but they may also be things that you are not exploiting in your own business and that some other business could. Identify which businesses can take advantage of your opportunity, and you have the basis for setting up a deal where you could potentially achieve a sale price of many times EBIT.
Often, to get maximum value for your business, you need to have more than one offer on the table — specifically, if you have at least two buyers who want the business. This means two buyers who have the capacity to pay and who are interested in bidding against each other, which will give you a much better opportunity to capture more of the strategic value.
Buyers can be individuals, private equity or investment firms or companies. In general, individuals don’t have the scale or the reach to do more than run the company the same way as the existing owner. Most individual buyers are looking at businesses below $1 million. Private equity or investment firms are masters at identifying underperforming assets and buying them cheaply. Neither of these types of buyers are usually inclined to be strategic buyers.
So, your best bet for a strategic buy will usually come from a company that has the capacity to pay. By “capacity to pay,” I’m mostly talking about the size of the acquirer. One simple rule I have is that the acquirer should be five to 20 times the size of the company being acquired. The reason being is that, if it’s too small, it’s too big a risk because then it becomes a merger, not a purchase, and you’ve got all sorts of issues with culture and everything else. If it’s too big, then the costs of the acquisition could just as easily be applied to a bigger acquisition.
“Capacity to pay” is also about the buyer having the ability to fund the purchase. They have a balance sheet that has some cash in it — they wouldn’t want to fund a business that’s a complete debt and they wouldn’t need to source additional funding. That would make the risk of the transaction go up.
So you typically want a buyer who’s generating some cash, that has the balance sheet strength to purchase. They’re between five and 20 times the value of your company and can exploit the capabilities of your company in a two-to-three-year time frame.