Worth a dollar to one buyer and three to another

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A competitor sees your customers. A private equity firm sees a platform. A larger group sees a factory running at 60 per cent that saves it building another. The same business is worth a different amount to each of them, and an owner who understands why negotiates from a different chair.

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Imagine your business makes $4 million of EBITDA, and four buyers look at it. The first sees a solid business that stands on its own. The second sees the same $4 million, plus $1 million of costs it could take out quickly. The third sees 1,000 customers it could sell its own products to. The fourth sees a foothold in a region it would otherwise spend three years building.

There’s no single correct valuation that all four would agree on. Each of them has different economics, and each will arrive at a different number for exactly the same business.

Who the buyers are

Buyers come in a few broad kinds. A financial buyer, such as a private equity firm or a family office (the investment arm of a wealthy family), buys mainly for the cash the business produces and what it might sell for later. A private equity firm may also see a platform: a first acquisition it can build on by buying others.

A strategic buyer, often called a trade buyer, is usually a company in or near your industry. It buys because owning you lets it do something it couldn’t do otherwise: reach your customers, take out costs, use your capability, or enter your market. Because it can do more with the business than anyone else, a trade buyer may be willing to pay more than anyone else.

Same product, different economics

Suppose you have a product that brings in $5 million of revenue through a limited distribution network. For you, taking it national would mean years of recruiting, building channels, and finding capital. A strategic buyer may already have 200 salespeople calling on exactly the right customers. The product hasn’t changed. The economics available to the buyer have.

The same thing happens with geography: you’re strong in Queensland, and the buyer already operates in New South Wales, Victoria, and Western Australia. Or you’re strong in northern Germany, and the buyer already operates in the Netherlands, Belgium, Denmark, and Poland. It happens with customers: you sell one service to 500 clients, and the buyer can sell them three more. It happens with assets, when your factory runs at 60 per cent capacity and the buyer can move its own production in rather than build another plant. And it happens with cost, when the buyer purchases 10 times your volume and can improve your supplier pricing on day one.

That’s how a capability worth $1 to one buyer can be worth $3 to another. They can do more with it.

Don’t add up every gain a buyer might make and put it all in your asking price. The buyer is entitled to keep the value created by the capabilities and capital they bring. What you should understand is where those differences lie, because that knowledge decides who you approach and how you negotiate with them.

Ask what each buyer is really buying

Before anyone talks about price, work out why each buyer wants the business: what owning it lets them do, what problem it solves for them, what capability would take them years to build on their own, which of your customers they could sell more to, which costs they could remove, and what happens to them if a competitor buys you instead. That last one can outweigh all the others.

The same company can rationally be worth different amounts to different buyers, and an owner who understands each buyer’s reasons negotiates from a stronger position.

Who goes on the list

A good sale process doesn’t start by asking who might buy the business. It asks who could own it and create the most value from it. That list may include the obvious competitors. It may also include suppliers, customers, businesses next to yours, international groups, private equity firms, family offices, and companies trying to fill a specific gap.

Building that list is usually one of the first jobs of the adviser running the sale, done with you, because you know the industry and its players. The adviser then approaches the buyers on it under confidentiality and runs a timetable: a date for first offers, a shortlist, then deeper due diligence for the few still in. A valuation report can tell you what the business might be worth. Only a field of genuine buyers shows you what it’s worth to the one who values it most.

The day you’re down to one

It usually happens innocently. A competitor approaches you directly. The offer sounds attractive, you like them, and the conversations move quickly. You stop thinking about anyone else, and you sign exclusivity, which is an agreement not to talk to other buyers for a set period, usually while this one completes its due diligence.

Now the buyer has time. You have a deal to lose.

They may fully intend to complete. They also know you’re committed and the market has been closed off. That hurts when due diligence finds issues, when the legal terms tighten, when the price gets revised, and when completion is delayed. Each time, the choice in front of you is whether to accept the change or lose the deal, and that’s a poor place to negotiate from.

Where you can, create alternatives before you grant exclusivity. You don’t need 10 buyers. You need enough credible interest that no single buyer assumes they own the process.

What a second buyer gives you

Competitive tension simply means a disciplined process in which every credible buyer knows they aren’t the only one looking. Price may improve, and so may terms. Timelines tighten, and buyers put more of their own people onto it. You also learn which risks different buyers care about, who values the business strategically, and who is serious.

Above all, you get a benchmark. With only one buyer, everything they say sounds authoritative. “This is market.” “This is the normal multiple.” “Everybody requires this.” Maybe. Maybe not. Another buyer gives you evidence.

Alternatives protect you from false certainty, too. A buyer can be enthusiastic for months and still fail to get internal approval. Their financing can change. A deal can die for reasons that have nothing to do with your business.

There’s one catch when a buyer is also a competitor. Information should go out in stages: the teaser first, the Information Memorandum to buyers who have signed a confidentiality agreement, and the most sensitive material, such as customer details, pricing, and staff information, only to the serious few, late in the process. Confidentiality agreements help. They don’t change the fact that once a competitor knows something, it can’t be unknown. Before you release anything, ask what happens to it if the deal doesn’t go ahead.

If you’re raising money rather than selling, the same logic holds. One interested investor sets the terms. Two give you something to compare them with.

If you are the buyer here: assume you aren’t the only party, and work out early what the business is worth to you specifically. The value only you can create is your edge, so know it before you bid.

What to do this week

Write down 10 organisations that could own your business and do more with it than you can. Go beyond competitors to suppliers, customers, businesses next to yours, larger groups, and investors.

Next to each, write the one thing they could do with your business that you can’t. The longer and more varied that list, the less likely you are to end up with only one buyer, and the better you’ll understand what each of them is really paying for.

How to run a sale with more than one buyer in it, from what each buyer is really buying to what you show a competitor, is in Mastering the Art of Negotiation and Sales Processes. Why the same business is worth more to some buyers than to others is in Amplifying Market Presence and Growth Potential. Both are free to download from the Download Vault: manolutions.com/downloads.