01 Oct 10 Ways to Increase the Value of Your Service Company
In this blog series we’ll focus on building value in your business. Today I’d like to discuss the concept of “value” and what that means from a buyer’s perspective. In future articles, I’ll share ten ways to increase the value of a company. I’ll wrap up the series by discussing how you can start your own program to boost your business’ worth – and your likely selling price if you ever decide to put your company on the market.
Let’s start by defining a couple of terms: Fair Market Value and Market Price.
Fair Market Value is “the true underlying value” of a business according to theoretical standards, often acknowledged as “the price at which a business would change hands between a willing buyer and a willing seller, both being adequately informed of the relevant facts and neither being compelled to buy or sell.” Fair market value is usually obtained through a 3rd-party appraisal so the result does not depend on the parties involved in any transaction.
Market Price is the estimated price that a business will likely sell for on the open market, depending on the companies involved in the exchange. Market price is really a range of values since every business is valued differently by different buyers based on their economic realities, estimated synergies, and the circumstances surrounding the sale. For example, if your company is a good fit for a strategic buyer you’ll likely receive a higher price for the business than if you sell it to employees or to another financial buyer.
We see three types of buyers in the market:
Individual Buyers: these are typically individuals or partnerships that purchase and operate businesses for a paycheck. Stability of earnings is their primary consideration. Price they pay will generally be at or below fair market value.
Financial Buyers: usually includes private equity groups or investors that hire a management team. Growth potential is a key consideration.
Strategic buyers: typically these are companies that buy a company as a platform (or add-on) that can provide synergy to their other business interests. Their valuation is driven by their internal economic factors and growth they expect to achieve. If your company is a candidate for a strategic acquisition (few are) it will likely lead to the highest selling price possible.
In future blogs I’ll start talking specifically about how to increase the value of a service business.