As a business owner, you already know the importance that price has in a purchase decision. Unsurprisingly, pricing your business correctly is a critical step to attracting the right buyer. The first step to understanding how to price your business is to understand the types of buyers in the market.
There are three core varieties of buyers, the primary difference between these buyers is the intention behind a purchase. The first type of buyer is the synergy driven buyer. This buyer is the most difficult to price for because only the buyer knows what he or she will pay. The synergy buyer likely already has a related business investment. They expect to improve their operations by melding a new prospective business into their own. They know exactly what they are looking for and they know just what they want to pay for it.
The second type of buyer is the all-inclusive buyer. This buyer wants the whole business, tangibles and intangibles. The motivation for this buyer is a healthy strong business that will be a sound financial investment. Financial statements, projections, balance sheets, size, industry, economic dependence, debts, risk factors, employees and management, company culture and goodwill will all be considerations in the purchase decision. An all-inclusive buyer typically wants to own and run their newly purchased business and will be looking for a good fit and sound financials.
On the opposite end of the spectrum from synergy buyers are asset buyers. These buyers are purely looking to boost their tangible assets with the acquisition of a business. Because of this, they will not include any intangibles or income streams in their valuation of a business. Asset buyers are only interested in the calculated value of assets and are only looking to pay for those assets.
With the variety of buyers in the market, value can be subjective. It is dependent upon the relative worth to a buyer. Just like the adage that something is only worth what someone else is willing to pay. However, understanding your buyer and pricing will help secure the best possible price for your business.
To most effectively value your business the best course of action is to seek a formal valuation from an independent party. An experienced business broker can conduct this valuation for you. A formal valuation will adhere to established standards and give you the best objective value of your business, which is usually a range rather than a single amount. With the help of your business broker you can then identify your primary buyer. Using your business valuation, you can establish a fair price that accurately reflects the value of your business and is attractive to your target buyer.
A successful deal will be mutually beneficial to both the buyer and the seller. Profit isn’t always the bottom line in a deal. If you’re looking to attract a specific type of buyer, price is a tool that you can use to attract that buyer.