Top 5 Reasons Why Buyers Pay Premiums for Companies
Most business owners have unrealistic expectations about the value of their business. It is very entrepreneurial to want the maximum for one’s business, but look at it from the buyer’s perspective. There has to be a compelling reason to pay more for a company beyond its underlying cash flow or salable assets. So, what type of buyer will pay more—and why?
Not all buyers are created equal. Most base their decisions strictly on your EBITDA (earnings before income tax, depreciation, and amortization). But there’s a second, rarer breed known in the trade as a strategic or synergistic buyer who is more focused on the hidden potential of your company. This buyer is hard to find. It takes considerable time, research, and energy to identify the most suitable strategic candidates, and then it takes real experience to engage them in the right manner. But the effort is worth it because exiting your company for maximum value could mean walking away with millions more in your pocket.
But to be clear, strategic buyers will not cough up a substantial premium unless there’s a good reason. That reason must translate into an opportunity for the buyer.
Premium Paid=Buyer Opportunity.
Here are the top reasons and/or opportunities that prompt a buyer to pay premium price for a company:
1. Economies of scale. Your company enables the buyer to consolidate certain functions with other companies or enterprises they already own.
2. Increased revenues. Creating a new revenue stream by cross-selling your existing products to other customers or by absorbing your existing market share.
3. Speeding up market penetration. Filling a gap in the product portfolio, or reducing research and development expenses, and/or time to market.
4. Undervalued assets. Acquiring certain proprietary assets that are not being utilized or are underutilized. These could be processes or R&D assets.
5. Intellectual property and talent. Acquiring technology that enables the buyer to enter new areas of business or acquiring valuable human talent currently employed by your company.
We work with companies to discern and unlock opportunities like these so they can sell for maximum value to strategic buyers. That means understanding each potential buyer’s business model and how the selling company might complement that model. Your exit strategy can make a difference in the millions.
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