In this 5 part series I will be posting an interview with Alan Rose and Chris Bond; Alan and Chris represent business buyers and sellers, respectively.
Ed: What are the different paths to selling a business, and how does that choice affect valuation?
Alan: There are probably four or five different paths. Somebody can sell a business strategically, which means selling it to another entity, typically in the same business space, or to one who shares the same customer list. You could sell it through an intermediary, creating a bid/auction scenario, or you could have a private financial sale, which could either be done by an individual or a management buyout. And lastly there’s the ESOP opportunity. ESOP is an Employee Stock Ownership Plan where the employees acquire the business.
Chris: The way it affects valuation is if you have a financial buyer, that is likely somebody who will zero in on the asking price and perhaps want to negotiate off that as opposed to a strategic buyer, where the list price, if there even is one, may not even be material to the reasons why they’d make the acquisition. Often, strategic buyers will pay a premium for an operation; they may see it as a way to improve efficiencies, or it could be a missing link in their chain that will so improve their operation that they offer a great deal more to acquire that business than a financial buyer.
Alan: In the cases of companies that have intellectual property, it’s often difficult to value the intellectual property based on the results of the business. Aside from that a strategic buyer looks at different numbers than a financial buyer. A strategic buyer plans on incorporating or absorbing the business into an existing facility or an existing operation. Many of the departments, whether accounting, sales, quality, whatever, are duplicated, and not necessary. The money saved by consolidating can then be used to either repay debt, or provide a return on investment. A straight financial buyer is looking to operate the business "as is" and thus requires all of those departments, and the cash flow or the numbers that they derive the value from are really the net operating profits. A strategic buyer often looks at the gross profit number and that’s where they start the valuation, whereas a straight financial buyer will look at the net profit and work off of that.
Alan Rose, Yarmouth Venture Group
Yarmouth Venture Group engages with business managers who have proven leadership capabilities and the desire to achieve a majority ownership stake in a business they will operate. Our firm is positioned to be uniquely qualified to provide expertise and guidance throughout the difficult tasks of finding and acquiring the right company, the right way, and then successfully operating that company. www.yarmouthventuregroup.com
Chris Bond, Murphy Business
Murphy Business is a business brokerage firm that helps its clients value, sell and buy businesses. With six offices in New England, Murphy’s growing team prides itself on practicing its unifying mission: to assist businesspeople through incomparably fair, honest and expedient service. Murphy’s partners network tirelessly on their client’s behalf in an effort to consummate the best deal possible.