If you are selling your business and you want the highest possible price, here is one way to get a premium over its Fair Market Value.
First, consider that the value or price an owner can expect to receive for their business is generally a function of: 1) free cash flow generated, 2) growth expectations, and 3) the risk involved in receiving the cash flows. These factors combine to determine the value for the business entity. Expressed another way, the value of a business is the present value of the risk adjusted future cash flows specific to the selling company.
Each company has a unique set of these factors. A Financial buyer is interested in how these factors measure up for the company on a stand-alone basis, and will determine a price that they are willing to pay for the business, or Fair Market Value, relative to their other business investment opportunities, including other businesses for sale. Most buyers are financial buyers.
But there may be another type of buyer looking to buy your business — a Strategic buyer. This type of buyer has a complementary business, generally in the same industry or a related field, and expects to be able to combine the two companies to achieve synergistic economic benefits. Synergistic economic benefits can take many forms: reduction of expenses through economies of scale, new or complimentary products or services, industry risk diversification, increased market share, customer acquisition, defense of a market position, upstream or downstream vertical integration, increased sales of core products, less expensive than building from scratch, and others.
By combining the two companies, the buyer expects to produce an economic benefit that is greater than that available to the selling company on a stand-alone business. Therein lies your premium to fair market value. The seller is now more valuable by the amount of the expected synergy, to that particular strategic acquirer. The seller’s premium is some portion of the synergistic value. The strategic acquirer can pay a higher price than FMV because they see more value in the selling company. In addition, the strategic buyer is generally motivated to achieve the strategic benefit. This provides the seller with some leverage, and helps the process to achieve a successful completion, particularly when the seller’s M&A advisor brings multiple strategic buyers to the table.
Identifying, educating and motivating strategic buyers is one of the many facets of successful M&A brokerage work. For more information on strategic buyers or the M&A selling process, Email Louis Cionci or call 707-778-2040.