If you are thinking about selling your business, you may have heard that you can get more for it if you can sell it to a strategic buyer. That is probably correct, but it raises some questions: What is the strategic value of your business? How do you get paid for the strategic value of your business? How do you find the best strategic buyers?
The first issue we should clarify is what is, and what is not, strategic value. Strategic value is not valued as an asset of the selling business. Many business owners recognize that a business buyer can take advantage of opportunities, within the business, that the current owner is not developing. This could be adding to the sales or marketing effort or investing in new equipment or other internal changes to grow the business sales and profits. This is not considered strategic value. A buyer may be willing to pay more for your business for its growth opportunities, but this is not considered strategic value.
Strategic value is the value of the additional sales and/or profits another business achieves by buying your business and by their ability to develop the tangible or intangible assets of your business. For example, if you have a new product and the potential buyer has a much larger sales force and marketing capabilities, they may be able to develop sales of the new product that are much higher than your business can. Another feature that may create strategic value is your market – your customers, location, market niche – that the buyer doesn’t have. By buying your business, they may be able to increase the sales and profits of the combined businesses beyond just the total of the two. The strategic buyer may achieve higher profits just by eliminating your business as a competitor and eliminating duplicate costs.
The problem with determining what the strategic value is in these examples is that its value is determined by the characteristics of the strategic buyer. For example, in the case of your new product being developed by a strategic buyer, the strategic value depends on the buyer’s capabilities. A regional player will be able to develop it less than a national player. The buyer who gets the most value from the product could be in a related industry and your product will give them an entrée into a new market that they can sell other products into.
It is difficult to calculate which strategic buyer would gain the most value from the purchase of your business and how much the strategic value is to each. You may be able to make an estimate. For example, in the case of the new product, you may know what the size of the market is and what the profit margin is for the product. This gives you an estimate of the potential sales and profits. Of course, a buyer may calculate these differently and they may not be able to gain all the potential sales. They may be more conservative in their estimates.
The next question is how do you get paid for the strategic value of your business? Buyers are not likely to pay you any more for your business than they need to. If you are dealing with only one buyer, and they know that, they may not pay you any premium for the strategic value. If you are not represented by an M & A Advisor, they may recognize that you don’t have the knowledge to know what your business is really worth to them and they not make the best offer. In my next blog, I’m going to discuss how to find the best buyers and get paid for the strategic value of your business.