This is a perennial question for most business owners contemplating an exit. The simple and truthful answer to the question, what is my business worth? Is that the business is worth whatever a buyer says it’s worth, provided the vendor agrees at a point in time! That’s it, simple. The fun starts when the vendor disagrees with the buyer and now we have a valuation gap.  

The idea of valuation suddenly gets complicated. If you think valuing a publicly listed business is not straight forward, try valuing a private company. Whilst the truth is that a business is worth whatever a buyer says it worth, the value is more fundamentally based on the worth to the acquiring party and is often driven by the impact that the seller’s business will have on their overall picture once merged with the buyers business/s. People normally buy another business to solve a problem (although rarely admitted). The bigger the problem that’s potentially getting solved, the more the buyer will be inclined to pay. The business being acquired will provide revenue, customers and/or expertise, capability, IP etc. The synergies resulting from the acquisition or merger (whilst not readily given up by the buyer, who usually insists the synergies are theirs) will normally find their way into the valuation equation.

Financially engineered deals in the SME space normally favour the buyer. Traditional valuation methodologies in this space are generally useless as earnings are typically patchy, governance is poor and risks for the buyer are high. Often the only deals worth doing for vendors are with strategically motivated acquirers. This kind of buyer is hard to find, but well worth the effort.

To qualify as strategic, they must be already looking to acquire. This is important because if you are speaking to somebody who is not already looking, then they likely to be an opportunistic buyer and most opportunistic buyers’ default to a traditional valuation method based upon a simple multiple of earnings.

Secondly if somebody is looking to acquire it’s essential that you establish what they are looking for. What’s their criteria? In other words, what sort of problem is being solved? If your business does not match their acquisition criteria, then it is likely to become at best opportunistic for the buyer, resulting in either no offer or a low offer.

Now if a potential buyer has independently flagged that they are actively acquiring and have detailed what they are looking for and your business matches those criteria (at least at a high level), then now you have a potentially strategically motivated buyer who is much more likely to price accordingly. The Price in these circumstances is often much, much, higher than anything opportunistic.

When selling shares in a private business you must create your own market. You need to find people who want what you have. The reality is that your business will legitimately be valued differently by different buyers – and often significantly so – we see regularly see 50% + variations offer to offer even though the parties have had the same information and had the same questions answered in the same way.

The laws of supply and demand still apply to private businesses: your business is worth what somebody will pay for it.  The free market is beautiful thing – if you don’t like the price you don’t have to sell!

For more details on how to take a strategic approach to selling contact us at Oasis Partners – we have been unlocking value for the shareholders of private companies since 1984 and have completed over 500 successful deals mainly acting for sellers.