Strategic Sale vs. Financial Sale

Business buyers come in many forms, but a strategic acquirer is more likely to net you the highest price.

Many small or medium sized companies are sold for prices expressed as a multiple of cash flow or earnings. Each industry has a “rule of thumb” and an expected multiple that buyers will pay. You probably have heard multiples of this sort – 2 to 2.7 times Seller’s Discretionary Earnings. Sales at prices based on these sorts of multiples are characterized as “financial sales.”

Sometimes however, a larger company buys your company for reasons other than your profits or cash flow. They want some element of your business, not for what it generates in your business, but for what it does to their business. For example, you might have a product line they can easily and profitably sell to their existing customers. You might have a technology that they can use to cut their own costs. You might have all sorts of things they can profitably deploy in their business – geographic reach, certain prestigious customers, key employees or a good brand name. These elements of your business – the ones that have unusual value to certain buyers – are characterized as “strategic assets”. And the Buyers of interest are viewed as “strategic Buyers.”

The reason strategic Buyers are willing to pay more for your strategic assets is simple to understand. If they buy you as a standalone business, they can afford to pay a certain amount based on the ROI your business generates by itself. But if they get strategic assets that ALSO help them increase their existing revenues or decrease their existing costs, then they can afford to pay more, often much more.

When a larger company buys your company, they want to pay the price associated with a “financial sale” but secretly they hope to get more value by deploying your assets strategically. The key to getting paid the strategic sale price is having multiple strategic bidders, strategic assets that cannot be easily replicated and a skilled Business Broker advising and representing you in the sale process.

Do you have a small business question you would like answered about this article or others?  Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.