Strategic value, or a strategic premium, is the amount a purchaser is willing to pay for a business, over and above what an impartial business valuer might determine is ‘fair market value’.
Whether or not you can achieve a strategic premium in a sale is heavily influenced by timing and a potential purchaser’s individual circumstances, but there are things you can do to help tip the scales in your favour.
One of these is to find an advisor with experience in your industry sector and a deep network of relevant contacts who may see value in your business, over and above the general market.
How to set yourself up for a successful sale
When selling a business we always advise clients to start with 3 basic steps:
- Be very clear – with yourself and those closest to you – on why you want to sell and what you need to achieve from the sale;
- Seek a fair market valuation of your business from an experienced, independent valuer;
- Decide what help you will need to sell your business.
When it comes to Step 2, a professional valuer who understands your industry will provide a value based on: their assessment of the business’s future maintainable earnings; key health factors of the business; the external market environment; and market comparables i.e. what like and similar businesses are selling for.
Once you have this ‘fair market value’, Step 3 requires you to consider:
- Who will I work with to sell the business?
- How will we target interested parties?
- What should the negotiation framework and asking price be?
Now you may be thinking: “Hold on, we just valued the business. Isn’t that the asking price?”
Not necessarily. The asking price can vary quite widely depending on the parties who may be interested in your business, and this is where strategic premiums can come into play.
A good example of this is a client case study we’ve shared on our website. I was engaged to provide a valuation for this client and I assessed his business had a fair market value of about $3 million. We later sold the business for him for $6 million.
In this case the buyer came from within our own network – a former client who we identified would see strategic synergy benefits in adding this business to their own – but we also worked with the seller to identify and target almost 20 other parties, eventually meeting and negotiating with several of them.
Strategic premiums don’t just happen
In terms of achieving a strategic premium, good advisors have several roles to play:
1. They will work with you – before going to market – to identify and target parties who may see value in your opportunity, over and above the general market.
A good advisor will do this by prompting you to consider the following:
- What’s happening within your industry?
- Who are the major players?
- How are they playing?
- Who is struggling and why?
- Who is being really aggressive?
- Why would a particular party buy this business?
- What does it give them that they don’t already have?
- Could they create it themselves, or would buying this business give them a competitive advantage?
These detailed discussions need to be had between you and your advisor, target prospect by target prospect.
2. They will have their own deep and relevant network of contacts.
Experienced advisors will have a network of relevant contacts who they can market your opportunity to directly.
They will also have the skills to research and identify other like or complementary businesses that might be interested, and connect with the senior decision-makers in those businesses on your behalf.
The more potentially aligned purchasers, the greater the premium that can be achieved.
3. They will negotiate on your behalf.
Often purchasers don’t want to share the value of strategic or synergy benefits.
They think: ‘I’m taking the risk on buying this business, so any future benefits should be mine.’
But the reality is those benefits can be shared with the seller depending on the competitive pressure in the market, how robust the potential benefits really are, and how well you negotiate.
Free resources
If you’re considering a business exit and would like to learn more about strategic premiums – and how you can drive positive strategic value in your business – take a look at some of our free resources:
- template – Strategic Value Checklist
- blog – What is ‘strategic’ value when buying or selling a business?
- ebook – Strategic value in a business sale – What is it, why pay for it and how do I create it?
JPAbusiness offers a range of business advisory services. If you are thinking about buying or selling a business, contact the team on 02 6360 0360 or 02 9893 1803 for a confidential, obligation-free discussion.
