Market Value V Strategic Value

A lot of brokers cut their teeth on selling businesses with what I call the Business Broking 101 Model.

This is as follows:

• List the business for sale
• Convince the business owner to do some advertising
• Take inquiry from that advertising and try and sell the business to one of those inquirers

I am not knocking it. It is the way most businesses would be sold by brokers. There are other ways, however. The valuation process for the appraisal involved in this is usually standard Valuation 101.

Look at the profit and apply a multiple to that to come up with the business value (if it is profitable). It assumes a transaction at Market Value.

I’m not saying this is not a legitimate process. However, a savvy business owner should understand that there are buyers out there that may not come through this process and a broker with the necessary knowledge, skill and contacts can adopt a different approach to find these buyers.

This is even more important considering that buyers coming through this less conventional process may pay more money. Business Broking 101 and Valuation 101 don’t apply here.

There is a big difference between selling a business to someone who comes in from an advertisement (off the street) and selling it to a targeted buyer who will benefit greatly from the acquisition.

Let’s look at the benefits that could accrue to a targeted buyer.

Market power 

• (No 2 buys No 3 in market and leap frogs No 1)
• Ability to capitalise on weakness that the target had, be that shortage of capital, lack of ability or lack of other resource.
• In most cases a bigger business is more valuable per $ of profit than a smaller business.

 

 Sign up to Newsletter

Weekly updates on business sales and advice, delivered to your inbox.

Subscribe

Synergy

• Benefit from access to extra products not already in their line
• Benefit from cost sharing across line-items.
• Access to markets that the acquiring company does not currently have
• Acquire a staff roster that the acquirer has weakness in
• Opportunities to sell products or provide services to the client base acquired

Potential: While buyers tell you they won’t pay for potential, that is not true. If you have technology or patents that are underutilised, or a database that is neglected, an acquirer with money will look to exploit that.

What we are saying here is that the two companies together will be more valuable than the value of each of the two companies added together but valued separately.

There are many other benefits of a transaction than those listed above. The key skill of the business broker is to highlight them and ensure that the acquirer pays for that extra value. This method I am talking about is often referred to as the M & A (Mergers and Acquisitions) Model. These brokers fairly distinguish themselves in the marketplace by the way they do broking.  

This distinction is characterised by the following:

M and A brokers:

Where to Start

A broker should start this process by having a conversation with the client as to who could be a potential acquirer. The client may or may not know the identity of that acquirer but it’s a good place to start. 

Then the business broker should highlight such “Synergistic Value” features in the Information Memorandum prepared to sell the business.

An experienced business broker will know where to look to find potential acquirers and if you’re lucky they will already have such prospects in their database (from previous campaigns). So what are the sources of such buyers?

• Brokers own database
• Other brokers that the original broker might network with to find such businesses
• LinkedIn
• From an advertising campaign

Let’s not only talk Market Value. There is often the opportunity for Synergistic Value.

About the author

---

---