The businesses that are typically valued in a financial (conventional) basis are usually those in property and business services, transport, and wholesale and retail, including food. These businesses achieve their valuations by driving the expected profits for the new owner higher. It is the absolute size, growth, duration and risk of these future profits which underpins their value.
Businesses that sell strategically are often based on patents, brands, copyright, trademarks, etc. You must identify and develop the assets that can be leveraged by a buyer to create a much larger business than you yourself could build. The value is based on what the strategic buyer can reap from your business, not what you can produce in terms of profit.
Finding strategic buyers is very different than finding financial buyers. And when you find them, the presentation of the business is different, and the whole due diligence process is also different.
When you identify a strategic asset in a business, it may be only part of the business. What constitutes a well-rounded business with multiple profit sources might be a complete distraction from the real strategic asset. In this case, the business will need to be reengineered.
One example of this is where a business consists of a product sales business and also a consulting implementation business.
It makes sense, from a business perspective, to capitalise on the implementation work available from your local sales, but if another company wants to take the product international, they will typically leave implementation to others. One possibility is to split the two components of the business and sell them separately. This might work if the assets that support the strategic sale can be licensed by the implementation business.
Splitting the sales entity and establishing a licence to use the IP could allow the business to be split into two entities that, sold individually, net more than a sale of the combined business.
It will take time to reengineer the business and to build a track record if the value of the business is to be maximised. Businesses that have a strategic asset often cannot identify where the value is and how to separate it. This leads to confusion in the buyer’s mind as to what they are purchasing.
Sellers, too, often can only see their business as a single entity and not a collection of different businesses. Even owners of fairly simple businesses are often unable to identify their business’s real value.
And this is why it’s so important be able to evaluate strategic assets in a business. Strategic assets help you identify how to structure your business so that you can get the maximum worth from it.
The objective of selling your business should be to maximise the value received, even if the business is sold as parts and so the full proceeds are only amassed over a period of time.