April 22, 2016
Selling your business the hard way.
Regardless of whether you want to sell your business next year or in twenty years you will basically only have two realistic buyer types for an external sale for your business:-
The Financial Buyer
When selling your business the financial buyer is basically buying rights to your future profit stream, so the more profit you are making the more your company will be worth to them. The value of the business from a buyer perspective can be increased by de-risking it as much as possible. Creating recurring revenue is vital and reducing the reliance on one or two big customers is a wise precaution. It is also beneficial to put in place a team of strong managers.
The Strategic Buyer
Arguably the harder option is to sell to a strategic buyer. They care more about the value to them of your business when it is in their hands and might involve factoring in how much more of their existing product they can sell by owning your business. Strategic buyers tend to be big businesses, so in reality the additional profit they can make from being able to sell more of their product can be substantial. Strategic buyers consequently will often pay more for your business than a financial buyer would ever consider.
An example exists of a Technology company that created a software application that improves the conversion of numerical data into a Venn diagram. This was of incredible value to another organization where this software allows enhanced sales or functionality to their own core product. This instance occurred in America where a company attracted an offer of $1 million based on sales of $1.5 million from a financial buyer; which is a typically low valuation.
They knew that when selling the business it could be worth more to a strategic buyer, so they searched for a company that could really profit by embedding his Venn diagram software into their own product. They found a business intelligence software company looking to express their data more visually. The buyer could clearly see how owning the company would enable them to sell a whole lot more of their own software product. They paid $8 million for the business, more than five times revenue which is an incredible result.
Be prepared for every eventuality
So why bother making your business attractive to a financial buyer when the strategic buyer will pay so much more?
The answer is that strategic acquisitions are rare. Every industry may only have a handful of strategic acquirers, so you are fishing in a very small pool with many variable like the economy, interest rates, and the competitive landscape out of your control. In addition to many other aspects that will dull a strategic acquirer’s appetite to buy your business.
If you think of your business as being like a promising child athlete who has a dream to become a professional athlete. This is a very hard dream to make a reality and it may well be a long shot with issues like injury, poor coaching or simply not having what it takes to get to this level. But rather than ending the dream for them you would probably make sure that they continue to study hard so that if the dream does not become a reality then they have a good education to fall back on.
It is exactly the same when positioning your company for an exit. Of course you will want to find a strategic buyer in a lucrative exit but a financial buyer is much more likely. Financial buyers are looking for companies that have done their homework – companies that have worked to become reliable cash machines.
The Profit Key helps companies position themselves correctly and puts the structures and systems in place to make sure you have the best possible chance of selling your business and maximizing the cash value whenever you choose to sell it.