By Dean Demeyer
Chartered Accountant, & Licensed Business Broker
The value of a business is directly proportional to the opportunity a buyer perceives. To fully appreciate this concept, we first have to differentiate between potential and opportunity. Most business sellers will consistently stress the potential their business represents to a new owner.
Trouble is, the buyer’s response is also consistent: “If I am going to have to extract the value of the potential, then why should I pay you for it?” Potential won’t add any monetary value to your business sale, but it will help sell the business.
Opportunity, on the other hand, is perceived differently than potential. It already exists and the new owners can benefit from your hard work in creating those opportunities.
For example, let’s say we are selling a crane business. The owner has identified there is enough work to bring a new, larger crane online. However, the owner doesn’t want to spend the money commissioning a new crane before the business sale.
That idea represents potential. But if the owner does buy a larger crane now, so that a new owner can extract the benefits from it, then that’s an opportunity that actually exists. Sale prices based upon opportunity are higher than those based upon potential.
In reality the difference is whether you will leave with a nice bonus or give your business to someone as a going away present.
Before attempting to sell a business of any size, the owners should:
- Know the difference between the various buyer types;
- Determine how to attract the best buyer;
- Change the business’ potential into opportunity.
Various buyer types will consider future potential and actual growth opportunities differently and pay prices accordingly.
Lifestyle Buyers (95% of the buyers’ market) tend to focus on the here and now and will not pay prices based upon potential or projections.
In essence, this group is the buy-a-job market.
They must see potential for growth, but as stated above, will not pay for that potential.
Industry Buyers – a business similar to your own – generally focus only on selected fixed assets and will not pay for goodwill.
They will ignore potential and opportunities and are usually buyers of last resort. However, there are some occasional circumstances where industry buyers can be the best buyers.
For instance, where they have a strategic reason to buy, and importantly, know that you know the reason.
Sophisticated Investors are usually high net-worth individuals, an investor group or a small corporation looking for growth opportunities and higher return on investments. They focus on the present and the future. They are often the buyers of choice as they will consider future earnings opportunities when assessing value.
Strategic Acquirers are typically larger ASX companies who have long term structured plans.
Their purchase mentality is not based purely on economic considerations. They are very much opportunity focused buyers. Opportunities to establish new markets, acquire new technology, better distribution channels for their current products. So, in summary, the value of your business lies in a buyer’s view of its future. It is ultimately the buyer that determines value.