Sell Your Company for Strategic Value

What does strategic value mean as it relates to the sale of a business? To a business buyer it means that your company is viewed to have a value beyond the value that the historical financial performance might suggest. A financial buyer will typically pay between 4 and 6 times EBITDA or free cash flow. There is no magic here. The theme is that this formula gives the buyer the ability to cover the debt service for the loan while providing a reasonable return on their equity. If the acquired company performs at least at the same level post acquisition, it is a safe investment.

What would cause a buyer to pay a business seller any more than a financial multiple? Buyers certainly do not willingly volunteer to pay more. They must be encouraged to do this and that encouragement generally comes in the form of other interested buyers that also recognize strategic value. What characteristics of a selling company would cause multiple buyers to seemingly over pay for an acquisition?

The key is that the selling company has to create potential that can be leveraged by the new owner. Simply by putting the resources, customer base, brand name, sales force, distribution system, manufacturing efficiencies, etc. behind the acquired assets they can often dramatically improve the return from those assets.

One of our clients with the president as the only salesman had only 12 customers. They had a complementary product to the eventual buying company's product line. The buying company had 27 sales people and 800 customers that were fertile prospects for the newly acquired product. Sales exploded post acquisition.

The buying company understood the potential that they would be able to unleash and was willing to give our client some credit for this projected success. We did encourage them to take this enlightened view with the help of their biggest competitor who was also interested in the acquisition.

One theme that creates strategic value is scalability. Can you take the technology, expertise, processes and procedures and easily translate that from a small company base to a much larger company. At one extreme you have an owner who is the ultimate subject matter expert and all business comes through him. This is not attractive for a buyer. At the positive extreme, the selling company has a well documented procedure manual, a training protocol and a well developed customer relationship management system. This can be more effectively leveraged by the buying company thus setting the stage for driving strategic value.

Sometimes just having a coveted customer base with barriers to entry can immediately turn a selling company into a strategic target. Doing business with the Federal Government or the Department of Defense can be a great business, but getting on the approved vendor list can take years.

One of our clients had gotten technical approvals with several telephone companies' and wireless companies' headquarters. This did not guarantee that the multiple local decision makers would buy from him. It did, however, provide him a valuable "hunting license" within these giant companies.

Innovation is a powerful driver of strategic value. It is not just limited to software, Internet, Bio Tech, or information technology who are often the poster children for some highly publicized generous acquisition multiples.

Innovation can take on many forms including improvements in manufacturing, distribution, training, marketing, sales systems, etc. Your merger and acquisition advisor's ability to recognize, document and articulate this leveragable intellectual property will go a long way toward maximizing your transaction value when you sell your company.


Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, providing business broker and investment banking services to owners in the sale of lower middle market companies. For more information about exit planning and selling a business, click to subscribe to our free newsletter The Exit Strategist