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What Might Make A Buyer of a Private Company Pay A Higher Price?

Reaching That Higher Value

Reaching A Higher Valuation

An experienced UK business broker explains why some private companies sell for higher multiples than others – and what sets them apart.

In the market for exit sales of private companies there are the weak or average businesses that sell for a pedestrian multiple, and then there are the high flying, desirable companies that sell at top of the market prices. So what do these high flying companies have that makes them so valuable?

What Qualities Does A Business Need To Sell For A Top Of The Market Price?

To sell for a top of the market price a business has to have most of the following qualities:

A sustainable competitive advantage
Buyers will only pay a premium if they are confident of the company’s ability to generate profits into the foreseeable future. So what features of a business might create this level of confidence? It could be a well- known brand – or a compelling sales proposition for the customer. An attractive and growing customer base certainly helps. A technical or operational advantages over the competition is always attractive, especially if it can be protected by a patent.

A high quality, diversified customer base
Buyers like businesses with high quality customers that pay on time and are successful in their own markets. A high proportion of turnover with one customer is always a red flag. If you have this problem it is imperative to find new customers to rebalance the customer base.

A credible growth strategy
A business that is serving a growing market, or has opportunities for product range extension, will always be attractive. This is especially the case if there are straightforward opportunities to expand into new segments or territories.

A stable and committed management team
In ideal circumstances an experienced and ambitious team that can run the business without the owner’s day to day involvement. Buyers are paying for the future profits of the business, not rewarding the seller for his hard work so far. They want to be sure that when the seller leaves the business there are good people already in place to drive it forward.

Good operating systems
Businesses that are reliant on an owner or a senior manager to hold everything together are not going to attract a premium price. Only businesses with systems and procedures that maintain control over operations, and quickly bring new employees up to speed, will be attractive to buyers.

Effective financial controls
Buyers will rarely pay a premium for a business if the financial systems do not clearly show which customers and products are generating the profit. Bigger businesses will need to show evidence of reliable budgeting and reporting systems. The kind of systems that hold management to account and manage cash flow.

Good and improving cash flow
In the end it all comes down to cash flow. Buyers will want to see a strong return on the money they invest in your business, and need to be sure they can meet the payments on any debt they have taken on to fund the purchase. Businesses that constantly need new investment to finance working capital, or new assets ahead of growth, rarely command a significant premium.

 

If you are interested in finding out more about these and other issues relating to the sale of a private company one of our business sale experts would be delighted to talk to you in complete confidentiality. Click CONTACT ME to book an initial phone conversation or call us on 01604 432964

 
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