It depends upon who is buying. The first step in placing a value on your business is identifying the “Right Buyer.” The range of values that different Buyers may be willing to pay is staggering. Buyers pay for the opportunity. The Buyer who perceives the greatest opportunity is the Buyer willing to pay the most for your business.
Identifying the “Right Buyer” requires understanding the four main classifications of Buyers.
Strategic Acquirer. These are the very best Buyers. They almost always pay cash and buy at a premium. Typically, public or very large private companies, their decision to buy usually revolves around considerations of economies of scale, new channels of distribution, new technologies, or other integration considerations. To be attractive to a Strategic Acquirer, your company should fit most, if not all, of the following criteria: Sales over $3 million, EBITDA greater than $500k, Unique market presence or share Synergistic fit with the acquirer, Suitable management willing to stay.
Sometimes a business that does not meet these criteria can be the target of a “strategic acquirer.” A good example might be a small business that an acquirer believes could be franchised or expanded into a chain of similar locations. At Sunbelt, we look for every reason that may make your business attractive to a strategic Buyer.
Professional Buyers. This group of Buyers emerged as a force when the “merger mania” of the late ’80s ended, and Buyers began to recognize the opportunities in the private sector. Lower interest rates have also spurred the growth of these Buyers by encouraging the formation of investment groups whose purchases are made using a “schooled” approach. There are two distinct types of Professional Buyers, and the acquisition criteria they use are as follows:
A. Private Equity Groups look for revenues from $10 million upwards to $500 million, Earnings of $1 million for platform acquisitions Earnings, $500k minimum for add-on acquisitions, and Investment of considerable cash or equity, and they pay 3 to 5 times EBITDA
B. High Net Worth Individuals traditionally look for Revenues from $2 million upwards to $20 million, Looking for a business that can expand exponentially, Expect 6 figure future earnings, Expect to leverage a part of the purchase, Expect the Seller to finance part of the buy and they pay 2 to 4 times EBITDA. Sophisticated Buyers sometimes buy companies smaller than the outlined criteria. A good example of a business attractive to the sophisticated Buyer is a light manufacturing business expandable into multiple markets through expanded marketing and solid management.
Main Street Buyer. By far the largest group of Buyers, Main Street Buyers are the most common Buyer for Main Street businesses. These Buyers tend to focus solely on present and past earnings and will not typically pay a price based on future earnings. The Financial Buyer is buying a job or a career and will consider a fair price if the transaction meets the following criteria: A living wage typically commensurate with the initial investment and a modest return on the cash investment. Mainstreet Buyers are willing to pay 1.5 to 3 times SDE. (Not EBITDA), are often looking for SBA or Seller financing and a business that is a good fit with their skills.
Industry Buyers. Unless they are doing a consolidation or roll-up in their industry, this Buyer is almost always the Buyer of last resort. If you have to sell, the Industry Buyer is usually the only Buyer you will attract. The difference between the Industry Buyer and all others Buyers is the value of goodwill: Most of the time Industry Buyers won’t pay for it. The Industry Buyer typically will pay Liquidation value, book value, or adjusted book value.
A business is worth more if: sales are increasing, if it is an established business, if profits are growing, if the adjusted net income is over $100,000, if management is in place, if the assets are in good condition, if the Seller is willing to help finance the transaction if the business qualifies for an SBA loan in addition to many other factors.
The first step in selling your business is understanding what it is worth. SUNBELT BUSINESS BROKERS can assist you with a free professional business valuation.