By: Patrick Ungashick
“What will my company be worth at sale?” is perhaps one of the most common questions business owners ask when contemplating their exit. It’s not only owners who expect to sell their company to an outside buyer ask either. If you intend to sell your business to your employees, you still need to know the answer to this question. Even if you want to give your business to your kids, this question is essential to plan for taxes and other financial issues. Regardless of which of the four exit strategies you intend to implement, you need to know what your company is likely worth to an outside buyer.
That’s where the problem occurs. How do you know what a buyer might pay for your company when typically there are multiple potential buyers? You can and should research average company sale prices in your industry (usually expressed as a multiple of adjusted EBITDA (LINK) or in some cases revenue)—if you don’t know these benchmarks you are operating blindly. However, this information only tells you what other companies have been selling for. It does not specifically address what YOUR company may sell for. Even more frustratingly, you may have heard stories from other business owners (or your advisors) about how they got wildly different offers when their companies went up for sale. Why does that happen?
Different Buyers = Different Motives
When you go to sell your company, typically you and your advisors will follow a process that confidentially contacts many potential buyers (often dozens to even a few hundred) to solicit inquiries and offers to purchase the company. The one thing that all of these potential buyers have in common is they are seeking ways to grow their businesses, and perhaps an acquisition of your company will help them drive their growth. Also, while they share the same desire to drive growth, these buyers are different from each other. They are in different situations, have different needs, and face different internal and external challenges. These differences manifest into different motives from one potential buyer to the next. Furthermore, these different motives likely translate into different multiples one buyer may pay for your company compared to another.
For example, here are some of the common motives that cause different potential buyers to be more (or less) interested in buying a company:
- Geographic expansion: the buyer lacks operations or presence in your location and sees acquiring your company as a means to launch in your territory.
- Diversification and Cross-Selling: the buyer wants access to the products and services that your company has, to complement its existing products and services.
- Market Share / Client Acquisition: the buyer seeks to increase its market share, scale, and/or profitability by acquiring your customers and clients and adding them to its platform.
- Talent Acquisition: the buyer seeks to expand its team by acquiring your company and the proven talent that you have assembled.
- Technology Acquisition: the buyer wants key technology that you have developed to leverage across its operations to open new markets, reduce its costs, embed in its services, etc.
- Competition Elimination: the buyer wants to acquire your company to remove it as a competitor, or to prevent another competitor from buying your business.
While any buyer may have all of these motives to some degree, typically each buyer will have one or perhaps two over-riding reasons that drive its interest in acquiring your business—and the price it is willing to pay. Different buyer motives translate into different prices.
That is why if you and your advisors run an effective process which attracts multiple qualified buyers, you are likely to experience a diverse range of bids. In our experience, it is common that the range between the lowest and highest offers is two to three times more or greater.
For example, assume your company is doing $3 million adjusted EBITDA (link). After marketing your company to multiple potential buyers, you receive the following bids:
- Buyer A – offers to pay $15 million for your company (5 times EBITDA)
- Buyer B – offers to pay $30 million for your company (10 times EBITDA)
- Buyer C – after initially seeming very interested, this buyer withdraws from the process without making an offer
On the surface, it would look like either Buyer A or Buyer B should go back to grade school to learn basic math, because how can one buyer offer five times EBITDA while another offers twice that amount? Furthermore, what’s wrong with Buyer C because it seems they think your company is worthless. While no buyer is perfect and all buyers make mistakes, the more likely explanation is these three buyers have different motives in mind while evaluating your company, and these mixed motives translate into different multiples they are willing to pay.
What’s Important for You and Your Company
If different potential buyers all valued a business solely based on that company’s multiples of adjusted EBITDA, then all offers would be relatively similar. However, in the real world, this does not happen. Different buyers have different motives and pay different multiples.
Don’t fall into the trap of trying to anticipate one buyer’s motives over another’s, because it is nearly impossible to know a buyer’s internal dynamics, and motives change with time. Instead, focus on getting your company ready for exit and then be prepared to experience different motives producing different multiples. To learn more, watch this helpful webinar with several real case studies, and suggested tactics for you to follow.