There are 54 factors that affect the price of a closely-held business. The following is a look at the top 10 of these factors that have the biggest influence the selling price of any business:
Number 10: Industry Outlook
If the outlook for the industry is bright, the price goes up. Buyers look hard at the outlook for a company's gross margins, future growth projections, international economic factors, etc.
Number 9: Depth of Management and of the Sales Team
If an owner wears all of the hats, including generating most of the sales, the price will go down. A strong and experienced management team to operate the business is key value driver.
Number 8: Customer Base
If a company has limited customer concentration with no single customer representing more that 5-10% of revenues the price goes up. If the customer base is made up of “blue chip” companies, the price goes up too.
Number 7: A Good Story to Tell
Telling a company's story is critical in helping the buyer recognize the full value of a business. When this in-depth marketing “package” of the business is combined with many years of merger and acquisition experience on the part of the broker/intermediary, the price of the business definitely goes up. A quality business broker/intermediary will prepare an extensive confidential offering memorandum that describes the business operation, the marketing and sales programs, its organizational structure, its facilities and equipment, its financial performance, and provides a financial analysis including a believable 5 year financial forecast.
Number 6: Stage of Industry Consolidation
If a company's industry is experiencing consolidating with the big companies getting bigger through acquisition, prices for smaller companies will rise.
Number 5: Company Track Record
If a company can show a track record of consistently growing profits and sales, buyers will pay more.
Number 4: Type of Business
A manufacturing company with a proprietary product will sell for more than a job-shop manufacturer. A distributor that adds value by offering installation, repair, and/or engineering/design will sell for more money than a non-value-added distributor. A service company with a special expertise will sell for more than a similar service company without this expertise.
Number 3: Revenue Size
The larger a company's revenues, generally the higher the price. A business with $25 million of annual sales will sell for more than a company with $5 million in sales.
Number 2: Market Position
A company that dominates its market or has a unique niche in the market will sell for a premium over other companies that do not dominate their markets.
And now, the single most important factor influencing the price of the business, clearly is…
Number 1: Having Multiple Buyers!
When there are multiple buyers bidding on a business, the price of the business will exceed the price paid for a business that is sold without competitive bids. We see the price escalation caused by multiple bidders all the time. It does not matter whether the business is priced at $4 million, $8 million, or $150 million; the key to maximizing value is creating a selling environment where competitive market forces work for a company rather than against it.
Richard E. Jackim is a former Wall Street attorney, an experienced investment banker, and the co-author of the recently published book “The $10 Trillion Opportunity: Designing Successful Exit Plans for Middle Market Business Owners” available at http://www.exit-planning-institute.org and major online booksellers. He may be reached at 847-303-6554 or at http://www.christmangroup.com.