In the buying and selling of businesses, all parties to the deal are usually hyper focused on valuation. Discounted cash flow models, book value, comparison to similar deals, multiples of revenue or earnings are some of the more popular approaches. The deal is usually expressed in this light because no matter what side of the deal you are on – you want to feel like the final price worked in your favor.
The truth is that your business is worth what some specific buyer will pay for it based on the value they feel they can extract from it over time. Period. The delta between the value placed on your business can vary greatly between Buyer A, Buyer B and Buyer C. You need to understand how and why your business is valuable to these different buyers.
Do you have a product that is complementary to their product set or service. Will buying your company help them to sell more of their products or services?
Do you have specific customers that they can grow because of the marriage between your firms?
Do you have intellectual property that would take them eighteen months to develop and could instantly make them competitive on near term contracts?
Could they be planning to sell their company and your business will make them three times more valuable?
I have been involved in the sale of several companies that were wildly unprofitable and still in early growth stage and yet they were sold at big premiums. If we had sold the businesses for book value, we would have left lots of value on the table.
As a seller, don’t limit yourself to standard valuation models. Research your suiters and find out what is important to them to unearth what the true value of your company is to that very specific buyer.
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