VALUATION · BUYERS
Same business. Three buyers. Three different prices.
Profit isn't the only thing that creates value. Who's buying matters just as much.
The laundromat buyer who couldn't lose
A retired businessman saw an opportunity to buy and sell laundromats. This was back in the days of cash, before card payments.
Here's how he did it.
- He'd find a laundromat for sale and ask the owner for the financials.
- If the owner couldn't provide P&Ls (because, you know, it's a cash business), he'd put in a very low offer.
- The seller would refuse.
- With no financials, the business usually stayed on the market. So he'd go back every week and lower his offer.
- Eventually the seller took it, just to get out.
Then he'd put every dollar through proper financials. Six months later he'd sell the same laundromat at a big return, because now he could prove the profit.
Same business. Same customers. Same machines.
The only thing that changed was the numbers. And that was worth a fortune to the buyer, not the owner.
YOU NEED TO KNOW YOUR NUMBERS.
Profit isn't the only thing that creates value
Most business owners focus on profit to create the value of their business. That's a good thing.
But don't get fixated on the idea that it's ONLY profit that creates value.
Most small and medium businesses are valued the "standard" way: PEBITDA multiplied by an ROI factor. Or EBITDA for businesses under management.
PEBITDA is the Proprietor's Earnings Before Interest, Tax, Depreciation and Amortisation. In other words, how much profit the business makes for the owner before the owner takes out any wages or discretionary money for themselves.
For more on this, read my post What Is My Business Worth?
What I want to talk about here is how different buyers value the same business differently.
There are three types. I call them the financial buyer, the lifestyle buyer and the strategic buyer.
1. The Financial Buyer
They're buying an ongoing profit stream.
They mainly care about how much profit the business will make for them. So they value it the PEBITDA way.
2. The Lifestyle Buyer
Also called the owner-operator. They want a sea change and a business they enjoy working in. Something they're passionate about. A bit like a serious hobby that makes money.
They can see themselves doing what you do. Often they're leaving the corporate world for a business with little stress that sustains their lifestyle.
3. The Strategic Buyer
The most interesting one. They often see value you don't see. That value can be:
- Your clients
- Intellectual property or expertise
- Location
- A niche market
- Untapped potential
Beauty is in the eye of the beholder
There are a myriad of reasons why people buy. Strategic buyers prove it.
The lunch bar flipper.
A friend of mine used to buy run-down lunch bars (café-type businesses) in good locations. He'd refresh and rebrand them, install systems and get effective marketing going. Once the business was cranking, he'd sell it, often at a huge return. Sometimes buyers approached him before he'd even listed it.
Unilever and Dollar Shave Club.
Dollar Shave Club was founded by Mark Levine and Michael Dubin after they met at a party and swapped frustrations about the cost of razor blades. Using their own money and investment from a start-up incubator, they launched in 2012, selling razor blades online by subscription. (I've been using them for years.)
Unilever, the global consumer goods giant, sold its products mainly through supermarkets and retailers. It saw the value in Dollar Shave Club's customer database and subscription model, and realised it could sell far more of its own products the same way. It reportedly paid US$1 billion for the business in July 2016. Read the story on Wikipedia.
Microsoft and LinkedIn.
Also in 2016, Microsoft paid billions of US dollars for LinkedIn. It saw value in hundreds of millions of members it could promote its Office products to. Read the LinkedIn story on Wikipedia.
Microsoft and Clipchamp.
Microsoft buys for other reasons too. It bought Clipchamp, a Brisbane software business, for the IP: a video editing platform. Clipchamp is now part of Microsoft's Office suite.
Your business isn't going to be a target for Microsoft or Unilever. But there could well be strategic buyers out there who'll value your business higher than you do.
Don't sell yourself short. Find out who those buyers are.
So how do you find these buyers?
That's the BIG question. I cover it in Part II.
Is your business ready for the right buyer?
Take my free Sale-Ready Scorecard. It takes under 5 minutes and you get an instant score across the key areas buyers look at.
Rather talk it through? Book a no-obligation 15-minute chat.
