The value of a business can be determined in a variety of ways and requires a thorough understanding not only of the actual business but also of the industry, competitors, as well as the current market. Like in residential real estate, in a buyers’ market there will be less competition for the buyer of a business which can drive down the multiple and overall sales price. On the other hand, in a sellers’ market owners may be able to increase the selling price. In addition, there are many other factors specific to each business that can impact price and demand.  Regardless of the market, along with ensuring the business will go into the most capable hands, business owners will also want to attract a buyer who is willing to pay a fair asking price for their company. Unlike a real estate transaction, there are many creative ways to structure the sale of a business that can be achieved through a variety of solutions. A few of the more common structures include All Cash Deals, Seller Financing or Earn-outs.

All Cash Deals

An All Cash Deal is the most straight forward and the least risky to the seller.  An all cash deal is where the total purchase price is paid to the seller upon the closing of the deal and nothing else is owed by the buyer. These types of deals can often occur when a larger company acquires a competitor and has the resources to pay the entire purchase price. All cash deals are more likely if the business in bankable.  However, there are also cases where a seller may accept a lesser amount for an all cash deal since it is often the least complicated structure and allows the seller to walk away at the end without much further obligation. Because of reduced risk an all cash deal can be attractive to a seller and the simplicity of the deal may off set a reduced price given the alternative of a more drawn out structure that may include additional financing or delayed payment.

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When purchasing a business, buyers tend to fall into two categories, Strategic Buyers and Financial Buyers. Financial Buyers are made up mainly of investors, like private equity or venture capital firms. While Strategic Buyers tend to focus more on the synergies the potential acquisition can create. These synergies can fall into various areas and lead to increased revenues or costs savings that would otherwise not be realized as a single company.

According to the Corporate Finance Institute, below are just a few synergies that companies may benefit from:

COST SAVING SYNERGIES

Information Technology: The cost of purchasing existing software can be very expensive and doesn’t always provide the perfect solution for the business. However, developing a proprietary solution custom to the company’s needs can be even more costly and time consuming. For these reasons, technology is one of the key strategic synergy’s buyers look to acquire through another firm. Regardless of size or client base, if the target company has a great production system solution that would work well for their needs it can be very valuable to a strategic buyer. [Read more…]

When a seller decides to list a business, they are hoping to attract a lot of interest. If this occurs, the question will then be how to determine the best buyer from the pack. After going through the valuation process with a reputable source, the owner should have a clear idea of the company’s worth. Buyers may be willing to pay more or less than the valuation depending on what they are seeking. Finding the perfect match could lead to a larger sale price, more agreeable terms, and usually a quicker closing. For this reason, finding the right buyer is critical and should be a defined process from the outset.

Strategic Vs. Financial Buyers

Buyers come from a variety of places and generally consist of two types; financial and strategic. A financial buyer is usually more of an investor than an operator and tends to be focused on using investor capital and debt to fund the purchase. Similar to flipping a home, the goal of the financial buyer would be to get in as low as possible and then sell it after 5 to 10 years hoping to increase the value along the way. It is common that financial buyers will structure part of the consideration as a seller note. This will help to ensure the previous owner will keep an interest in the company’s success and potentially add to future growth.

A strategic buyer is a bit different in that they usually are larger competitors in the same or similar industry looking to improve on their existing business. Strategic buyers are looking specifically for synergies where they believe they can either increase profitability with added volume or add to their offering with a similar or related product or service. Whatever the tactic, the strategic buyer may determine a much higher  [Read more…]