UNDERSTANDING DIFFERENT TYPES OF BUYERS
(No AI / ChatGPT has been used in the production of this article)
It's a good idea to ask yourself "Who will buy my business?" because the answer may not be obvious. Most business owners focus on profit to create the value of their business. That is a good thing, but don't get fixated on the idea that it's only profit that creates value in your business.
Most small and medium businesses are traditionally valued the ‘standard’ way by using PEBITDA and an ROI factor or EBITDA results for businesses under management.
PEBITDA is the Proprietor’s Earnings Before Interest Tax Depreciation and Amortisation. In other words, how much profit is the business earning for the owner before the owner takes out any wages or discretionary money for themselves. For more on this read my blog post What Is My Business Worth?
What I want to talk about here is how different buyer types will value the same business differently. There are basically three types of buyers and I call them the financial buyer, strategic buyer and lifestyle buyer.
FINANCIAL BUYER
These buyers are looking to buy an ongoing profit stream. They are predominantly interested in how much profit the business is going to make for them. So the PEBITDA method of valuation is how they will value the business.
LIFESTYLE OR OWNER OPERATOR BUYER
These are people who are looking for a sea-change and to have a business which they really enjoy working in. Maybe doing something they are passionate about or have an interest in. A bit like a serious hobby that makes money for them. People who are happy to be working in the business and can see themselves doing what the current owner does. They like what the business does and can see themselves spending time in the business and growing it. Often, people leaving the corporate world will buy a business which has little or no stress and sustains their lifestyle.
STRATEGIC BUYER
Now these buyers are very interesting because they often see value in the business which the current owner doesn’t see. That value can take many forms
• The clients
• Intellectual property or expertise
• Location
• Niche market
• Untapped potential
There are a myriad of reasons why people buy. It is definitely a case of “beauty is in the eye of the beholder”. A couple of SME examples:
1. A friend of mine used to buy run-down lunch bars (café type businesses) in good locations. Then he would refresh and rebrand them, install systems and get effective marketing going. Once the business was cranking he would sell it at an often huge ROI (return on investment). Sometimes he would be approached by people wanting to buy the business,
2. A retired businessman saw an opportunity to buy and sell laundromats. This was in the days of ‘cash’ before card payments. He would find ads for laundromats for sale. Then he would approach the owner and ask for financials. If the owner couldn’t provide P & L’s (because, you know, it’s a cash business) then the buyer would put in a very low offer. Typically the seller would refuse to sell. If the business stayed on the market (without financials it probably would) then the buyer would go back every week and lower his offer. Eventually, the seller would agree to the offer just to get out. Once the buyer had the business he would put every dollar through proper financials and after six months or so he would sell the business at a big ROI because he could provide proof of the profit.
There are many examples in the corporate world of strategic purchases. One of the best-known is the purchase of Dollar Shave Club by Unilever. Dollar Shave Club was founded by Mark Levine and Michael Dubin after the pair met at a party and spoke of their frustrations with the cost of razor blades. With their own money and investments from a startup incubator, they began operations in January 2011 selling razor blades by subscription online from a website. (I’ve using them for years). Long story short, Unilever, an international men's shaving products business that only sold through retail outlets, saw the value in Dollar Shave Club’s database and business model. They realised they could sell all their products this way as well. They reportedly paid US$1 billion to acquire Dollar Shave Club in July 2016. Read the story on Wikipedia DOLLAR SHAVE CLUB.
Another famous corporate story, and there are many of them, is the purchase for billions of US$ of LinkedIn by Microsoft also in 2016. Microsoft saw value in the hundreds of millions of members on LinkedIn to whom it could sell and promote its Office Products. Again, you can read the LinkedIn story on Wikipedia LINKEDIN.
Microsoft buys for other reasons as well. They bought ClipChamp, a Brisbane based software business, to acquire the IP in the form of a video editing platform. ClipChamp is now part of the Microsoft Office suite.
Your business may not be a target acquisition for Microsoft or Unilever, but there could well be strategic buyers out there who will value your business higher than you do.
The BIG question is HOW DO YOU FIND THE BUYERS? That will be covered next in Part II.
Want to know if your business is saleable and how you improve and make it more valuable? Then click the button below to take my free saleability score quiz. You will get a personalised report based on several areas of your business. It only takes 3 or 4 minutes to complete and is a free service.
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