If you actually go to market to be sold, your business will fall into one of three broad categories. You might be fortunate enough to qualify for a premium price. Very few businesses are likely to fall into this category. You may, unfortunately, not be able to be sold at all or may only be able to sell at a significant discount. Far more businesses fall into this category than one might think. Or you may fall into the middle. You will be one of many businesses that are quality businesses but not in the small category of those that can attain a premium.
Factors That Create the Opportunity for a Premium Price
It takes a special set of circumstances for a business to reasonably expect a premium price.
Perception of a Market Opportunity – The acquirer believes that something positive is happening in the market that is served by the target. Therefore, the acquirer makes the acquisition in order to gain entry to the market.
Acquisition of a Scarce Commodity – The acquirer believes the target has something (market share, a capability, a technology, etc.) it cannot develop internally.
Perception of Value – The acquirer believes the target has strong growth ahead of it. Therefore, the current price, though a premium, will not be a premium when measured against future performance.
“One and One Equals Three” – The acquirer believes there are certain economies or synergies that can be achieved between the target and the acquirer which, will lead to earnings greater than the target by itself.
Buying Frenzy – Acquirers believe there is a limit quantity of targets in the target’s industry and they are in high demand.
Even in the best of economic times, it is only a small group of businesses that meet these criteria. When considering your business exit or business succession planning, it is important to have a realistic picture of the true price your business will bring in the marketplace.
What has been your experience with businesses that successfully get premiums? Tell me any other factors you think might lead to a premium price in the comments.