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A business owner who is contemplating the sale of his or her business will naturally think about who might buy it. In fact, the more important question is why someone would buy it.
For starters, I can tell you there are three kinds of Buyers: Institutional Buyers, Tire Kickers, and the Guy who is buying himself a job.
Institutional Buyers are straightforward: Fortune 500 companies and other Buyers who have publicly traded stock and/or lots of cash at their disposal. They generally buy the larger companies – those north of $5 Million if not $20 Million in sales. They generally pay premiums for these companies since they are in effect using someone else's money. That is, company deep reserves of cash, or make a deal trading stock.
So if you are a Seller and your gross revenues are north of $5 million, this is the ideal buyer.
But keep in mind these Institutional Buyers get thrown a lot of deals every day. There generally has to be something exceptional about your business that would make them want to sink their teeth into it. Perhaps the right market that they wish to acquire, or something of that nature. It usually has to be exactly their kind of business. A soup company will not usually acquire a cracker company. There are exceptions to this, but that is generally the rule.
Tire Kickers. These are pretty wealthy individuals who are using their own money. In general I have found these kind of Buyers will look at lots of businesses and generally want to find "a deal", meaning something cheap. "Hey, McAuley, find me a business that's in bankruptcy". I've heard that statement over the phone quite a number of times, from wealthy people who can afford a lot better.
In short, I find Tire Kickers want to buy wholesale, not retail.
The Guy Who Is Buying Himself a Job, however, is willing to pay retail, because he is gaining employment for himself and, perhaps, family members. The Seller has to work with this guy a bit (education of the business, perhaps helping to finance) but without question he is the guy who will pay the most for your business.
The question here is, are you willing to finance in order to gain a better price, or are you willing to sell for a wholesale price? When a company is being sold, a business owner needs to put himself in the mind of the potential buyer. One thing we always emphasize to clients is that the true value of a business lies in the future as seen by the buyer.
A person who is interested in purchasing your business isn't buying the company for its history, nor for its current status, but for its future potential - the potential to bring the buyer both a healthy return on the investment of buying it and perhaps a well-paying job.
A potential buyer looks at a business to see what he can do with it - with his personal combination of money (resources), motivation (goals) and management (skills). Once he estimates how profitable he thinks it could be under his ownership, then, a buyer can determine what he thinks the business is worth.
The concept that the value of a business lies in the future as seen by the buyer can be a difficult one for business owners to embrace. They are full of knowledge about their company's background and important milestones, and may have a hard time accepting that future return on investment is the foremost question on the potential buyer's mind. While the bottom line, and past and present performance are certainly important, it is the buyer's perception of the future that carries the most weight.
That's why, when business intermediaries (people who are specifically trained in facilitating the sale of a business) assess a company to be sold, a great deal of effort is put into determining what the business's future is likely to be. An intermediary working on behalf of the seller will look at both broad economic trends and the specific marketplace for that company, including a detailed review of current and potential competition. The relevant history and performance of the business is then "recast" to provide a reasonable estimation of the future, thus determining the value of the company from the seller's perspective.
Meanwhile, the potential buyer estimates his or her return on investment by looking at such things as the cost of borrowing money, the degree of risk involved in the transaction, his or her personal need for income and liquidity, and the future expectations of profit.
If, for instance, sales are down, profits have dropped, competition in the market is high and big capital expenditures are needed in the business, this combination of factors will likely result in a lower purchase price being presented.
The type of business also affects how a company's value is estimated. For instance, purchasing an insurance agency is considered a lower risk investment due to the fact that most insurance policies renew yearly; whereas, a construction firm is a higher risk because its activity depends on being the successful bidder in contracts - the business is only as successful as its most recent contract.
How a business measures up to other similar operations in the same industry can also greatly affect the value a buyer will put on a business. In the printing industry, a buyer will want to know if customers have chosen a particular business due to loyalty, location, service, capability, capacity, timeliness, pricing, payment terms, or other more personal reasons.
When it comes to buyer motivation, it is also true that lifestyle goals are a contributing factor. Buyers may be interested in purchasing a business primarily because of its location, e.g. in a resort or vacation area. Family interests can also play a part - a buyer may be interested in a particular company because it provides employment opportunities for sons or daughters. Nevertheless, if the perceived future for the business isn't a bright one, no buyer will hand over the money regardless of how well matched the company is to individual goals.
When a business is sold, the seller's goal and buyer's goal are naturally opposite - the seller wants the highest purchase price possible and the buyer wants the highest return on investment possible - and a lower purchase price means less risk to the buyer in achieving a strong return on his investment.
These two, very different, perspectives set up a process that is inherently confrontational. Again, this is where the role of a business intermediary can help, as a third party that is not personally involved. The process is similar to using a real estate agent to sell your house, a lawyer to manage a lawsuit or an accountant to handle an income tax reassessment. Putting specialists between two "opposing" sides can help to make the transaction a smooth one, and will ensure that the necessary regulatory issues are appropriately managed.
"More Than A Business Broker"
Gary McAuley
Financing * Acquisitions * Mergers
Exit Strategies * Evaluations
www.sun-west.biz
gary@sun-west.biz