One of the first questions our clients often ask us is, “How much should I ask for my business?” And although there are sometimes exceptions, our answer is usually, “Nothing!”
Of course, what we really mean is that we don’t advise putting a price on a business -- especially in a hot M&A market, because you’ll never get more that what you ask. And since the typical acquisition takes between nine and 15 months, the business can grow during that time period and become worth more than when the process started.
Every buyer will value a business differently. A strategic buyer will typically pay more than an individual because they see the value of adding a going business to their current operation and recognize the synergies and opportunities for growth.
Terms and what is included in the purchase price are critical factors when evaluating offers. For example, let’s say a selling company has $1 million in adjusted EBITDA and receives two offers:
Offer A is for $5 million, all cash at closing. The buyer will take accounts receivable of $500,000.
Offer B is for $7 million, with $4 million cash at closing and a $3 million earn-out over three years. The earn-out is tied to retention of the top customer because it represents 30% of the business. This offer allows the seller to retain accounts receivable.
Which offer is better? If the seller had set an asking price of $5 million, Offer B would not even be open for discussion.
Because there are exceptions to every rule, we also consider the following when advising whether to put a price on a business:
Market Trends – If the business is in a hot industry with favorable demographics and has a history of growth, it will be very attractive to many potential buyers. We would advise against an asking price.
Complexity – If the business is on the small side and has little complexity, it may warrant an asking price. But if the business is larger and more complex, it could attract buyers from various arenas who might see different values, and we would not put a price on it.
Potential Buyer Types – We deal with first-time buyers as well as those who have made multiple acquisitions. Many times, when a buyer is new to the process or the industry, they get stuck and need some guidance on price. But if we’re dealing with an industry insider or private equity group that is experienced in valuing companies and the M&A process, marketing without a price is the only way to go.
Timeline – If you’re a motivated seller with a small business and want to sell quickly, pricing the business is probably a smart move. But if you have a larger business that meets some of the criteria listed above, and you are not in a hurry, going to market without a price will assure that you get your best price.
O&O can help determine the best marketing path and guide you through the complexities of the M&A process. For more information or a confidential meeting, call 913.64.0185 or email firstname.lastname@example.org.
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