Business sales can be complex and challenging processes. By understanding the process better and the motivations of the buyers, sellers may be able sell their business for more that its actual worth.
Some buyers may pay more for a business than its actual worth because they see potential for future growth and profitability. In this article, we will explore some of these factors. This can come from factors such as increased efficiency and cost savings, a larger market share, access to new customers or geographic regions, or complementary products or services. By acquiring a business, the buyer may be able to leverage their existing resources and expertise to unlock additional value that was not being fully realized by the previous owner. Additionally, there may be strategic or competitive reasons for the acquisition that go beyond the immediate financial returns.
Cost savings may arise in general and administrative costs resulting from the combined entity. These savings can result from the integration of offices and jobs. For example, there may be little need for two Presidents, two accountants or two General Managers. Since some of these people will not be continuing with the successor firm, there will be cost savings. There will also be savings in the consolidation of paid office or warehouse space or in additional retail locations.
The buyer anticipates increased market share and market reach. As a buyer gobbles up enough of the competitors, the buyer could result in holding a dominant market position allowing the surviving company to drive up market prices resulting in increasing profits. The buyer may gain increased geographic or customer reach. In acquiring the selling company, the surviving company will acquire the customers of the selling company. This would result in the sale of products and services to more customers for the buyer. This may also result in the sale of complementary products and services for the buyer.
Additional economic value could result from an extension of the value chain. The value chain is made up of all those companies between the development of a product or service to the delivery and consumption by the end customer. As an example, for a product, the value chain includes the manufacturer, the shipper, the distributor, the wholesaler and the retailer. An acquisition of a partner in the value chain may unlock value that neither company could realize on their own.
Lastly, the buyer may be able to improve profitability through the better utilization of assets. An idle machine can be made more valuable if it is used more often resulting in increased sales. Buying a competitor’s business will funnel sales to the buyer and result in the increased use of the asset. An acquisition can also solve the opposite problem in which there is too much business, and insufficient capacity, leaving customers unsatisfied and their sales dollars flowing to competitors. In conclusion, there are several ways that a buyer can expect additional profitability after the purchase of a business. From the savings in general and administrative costs to the extension of the value chain, increased market share, better utilization of assets, and increased geographic or customer reach, the potential for added value can make a business more attractive to buyers. Therefore, it is essential for sellers to understand these factors when considering the sale of their business.