What color of car would you rather buy? Based on your personal
preference, the answer to this question will affect how much you are
willing to pay for a vehicle that is identical in all aspects other
than color. What has this got to do with the market value of your
business you might ask? Well, simply put, traditional valuation
techniques generally ignore one important factor in their
calculation, the buyer.
For example, assuming a dealer has two used cars that are the same
make, model, year, etc., but one is blue and the other is silver.
They will almost certainly be priced exactly the same. However, if
your preference is for a blue car, you would no doubt buy the blue
car. In fact, the dealer would have to discount the silver car for
you to consider that as an option. Therefore, your preference has
effectively determined a higher value for the blue car over the
silver one, despite market-value suggesting that they are both worth
So how do you apply this logic to the value of your business? If
you�re thinking about selling your business sometime in the future,
you probably have no idea who will buy it and what their preferences
are, so what can you do now to position your company to maximize
value from an exit, and where do you start?
In terms of business acquisitions, there are generally two main
buyer groups, each with very different views of what is important to
them. These groups consist of either financial buyers and strategic
buyers. Financial buyers generally are individuals or groups of
individuals looking to invest in a business, whereas a strategic
buyer is usually a company looking to add to its existing
As an example, let�s assume that after some initial research you
determine that the most logical and likely buyer type is a strategic
one. You then determine, based on other acquisitions in your
industry, that the primary focus of most buyers is the quality of
the customer base being acquired, rather than say the management
team, who will most likely be surplus to requirements after the
Therefore, if the last five years have been channeled into
increasing and maintaining quality customers over the same time
frame, the buyer would most likely pay a higher price for the
business. This example highlights the impact of focusing attention
on the right aspects, which we call value drivers, of the business
to make it the most attractive to likely buyers when it comes time
to sell in the future.
Value drivers can include, among other things:
While you can control and manage most of the value drivers of your
business, other aspects specific to a buyer will also determine the
potential value that they can justify paying, including:
The impact of these factors is not possible to plan for, but is
buyer specific and will result in different values being placed on
exactly the same business by different buyers. They should be
considered when negotiating an actual sale with actual buyers. In
order to position your business to maximize value when the time is
right, go through the following exercises:
Undertake a market analysis of who is buying similar businesses to
determine the most likely buyer-type for your business.
Review recent transactions to determine what values are being
If possible, contact typical buyers anonymously to understand the
value drivers they�re primarily looking for in an acquisition
Understand the level and source of debt that could reasonably be
secured to finance an acquisition of your business, so you can
estimate the likely ratio of debt and equity.
Perform a strategic planning session for your business, ensuring the
long term goals of the company are focused on growing the right
value drivers based on your analysis above.
Create key performance indicators in order to track specific value
drivers on a monthly basis � include this as part of your monthly
financial package to ensure efforts are maintained over time.
Review the process on an annual basis to ensure any changes in buyer
types and value drivers are known and addressed in a timely manner.
Gaining a better understanding of how different buyers might view
the value of your business can benefit you, if you�re looking to
sell and help you build a more valuable company.
Chris Blees is the President and CEO of BiggsKofford Certified
Public Accountants and BiggsKofford Capital Investment Bank. He sits
on the Board of Advisors for the Alliance of Merger & Acquisition
Advisors, chairing the Certification Committee. He is co-author of
Middle Market M&A: Handbook for Investment Banking and Business
Consulting, scheduled to be released February 2012.