Ever received an offer from an unsolicited buyer?

The most common question I’m asked by a potential seller, is “what’s my business worth?” It’s also the toughest question to answer, as it depends on the industry, size of company, its historic and future profitability and the availability of sufficient buyers to create competitive tension to drive the price up.  The calculation is further complicated by the increasing use of deferred payments and future performance hurdles.

An indication of a “quality” business is the fact that they may well receive approaches from acquirers.    The Sellability Score recently analysed 5,364 businesses with a $1m+ turnover that had received such overtures in the USA, UK and Australia.  Their results are interesting:

Average Multiple of Pre-Tax Profit Characteristic
3.5x Across all businesses approached
4.3x Where the business had a historic profit growth rate of more than 20%
5.4x For those companies to have a unique product or service for which they have a virtual monopoly

Why so high for the latter?  Look at the perspective of a large company, who can both afford and justify such multiples. They will place less value on the turnover derived from products and services that you have in common. They will argue that their economies of scale put them in a better position to sell the things that you both offer today.

Likewise, they will pay the largest premium to get access to a new product or service they can sell to their customers. Big, mature companies have customers and systems, but they sometimes lack innovation; and many choose a strategy of acquisition as a way to buy their innovation.