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How the market pays for strategic value [case study]

WRITTEN BYJames Price | JPAbusiness

What is strategic value definition.pngWe recently sold an industrial services business. It was an owner-operated family business, less than 10 years old, with roughly $5 million annual turnover. It had been built with a very specific focus on particular markets and had very strong customer relationships.

One of the parties interested in this business was a larger conglomerate industrial services business with outside investors and equity.

It was looking to build a portfolio of like businesses across various service propositions in the industrial and environmental sector, with a view to potentially listing the business down the track.

The business we sold had a fair market value based on traditional market multiples. The price eventually paid by the large conglomerate, however, included a substantial increment over that fair market value

Complementarity – when the stars align!

The reason it paid above market value was that the purchaser saw the business as operating in markets it didn’t operate in, but needed to get a foothold in to develop its business model across those service areas.

There was what I call a ‘time and place opportunity’ because the acquirer needed something and this business provided it.

The purchaser believed the business was worth a lot more to them than it might have been worth to others.

In this case the stars really lined up for the vendor and purchaser. When this happens we find the market might pay 10, 15, 20 and up to 30% above what business valuers like us would consider fair market value.

Plus a little X factor

In the case of the industrial services company, above, the buyers included equity investors who you would assume would be very analytical and fact-based in their decision making.

The decision process was fact based, however I believe there was an element of intangible drive to do the deal because of the strategic value.

They wanted it, so they paid what was necessary to get it, and in doing so also included some countervailing deal terms to protect their risk on the investment.

Beauty, as they say, is definitely in the eye of the beholder.

If you would like support and advice to assess a potential business purchase opportunity, or obtain a valuation on your own business, contact the business advisory team at JPAbusiness for a confidential, obligation-free discussion.

 

JAMES PRICE | JPAbusinessJames Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.