Buyers are often attracted to certain businesses for reasons other than reported profits. They will even pay premium prices for businesses if they see other factors that matter to them.
Just what are these other factors? That’s what this series of articles is about. Prospective sellers take note!
These “other factors” might be called the “value drivers” (*1) in business sales. For any specific business and for any one buyer prospect, these “value drivers” will be unique. Generally, they can be grouped under seven separate general headings.
What Business Buyers Want
1. Attractive / Interesting Work
2. Strong Market Position
3. Right Location
4. Working Systems
5. Proven Stability
6. Good Books/ Records
7. Reasonable Price & Reasonable Terms
If two businesses each have comparable profits, a buyer will pay more for the one that is perceived as attractive or interesting work, that has a market future that is clearly positive, that has the better location, whose operating systems work better, and that has a clearer track record of proven stability. If, on top of all that, one business has better books and records and is offered on more reasonable terms, it will command a premium price.
It is useful to examine each of these value driver categories, and to see why buyers often pay more than what one would otherwise expect simply by looking at historic profits.
Attractive or Interesting Work
Some businesses just look like fun. From time to time, certain businesses are considered “hot.” It should be noted, however, that categories of preference change over time and vary from buyer to buyer, and that it often pays to invest in a business that is NOT popular at the moment.
Right now buyers will pay a premium for services, distributorships and some times of manufacturing, but retailers and food businesses can be acquired for lower prices and on better terms precisely because they are NOT “hot” right now.
Strong Market Position
Corporate buyers just love to acquire market share by buying smaller businesses in the same or similar markets they already serve. In Maine, this has happened recently in the print media and in construction. Why? Because the future of these markets is made even brighter by synergies that can be created by consolidation.
Individual buyer prospects, too, want to be assured that the future looks bright for whatever they buy. They particularly like a business that has carved out a place for itself that they can understand, one that has a significant market share already but where sales increases are still possible.
We recently sold Interface Tech News to another publisher that wanted to increase market share in the high tech reader market. We also sold a commercial painting franchise where the marketing-savvy buyer saw a rare opportunity to grow market share immediately, even though the business was already dominant in its market.
Original article by Glen Cooper, CBI, CBA, BVAL
Authorized for republication
(*1) The term “Value Drivers” as used in this article is similar to, but not the same as, the term used in business economic analysis defined as “the economic variables that are critical to revenue and cost functions of the business.” In the real world of small business, though, many of the factors listed in this article also end up fitting nearly the same definition.