What is my business worth?
If I knew the answer to this question I would play the lottery.
But the first step in any sale is understanding your buyer. Who is your buyer?
Buyers tend to fall into two main categories…financial and strategic. Understanding the different motivations of these two buyers can be the key to getting a good price for your business and answer the question “what is my business worth?”.
Financial Buyers are primarily interested in a company’s return on equity and cash flow. A financial buyer is acquiring your future profit stream, so they will evaluate your business based on how much profit it is likely to make in the future and how reliable that profit stream is likely to be. The more profit you can convince them your company will produce, the more they will pay for your business. This type of buyer is typically a long-term investor looking for a solid, well-managed company.
Strategic buyers are birds of a different feather. Usually a player in your industry, they are seeking operating companies that are often competitors, suppliers, or customers. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create incremental, long-term shareholder value. They are evaluating your business based on what it is worth in their hands. Because of this, these buyers many times are willing and able to pay much more for your business.
Understanding these differences between strategic and financial buyers is one of the first steps in completing a successful sale.