I have a new client. I’ve been working with them for some time, and
I know it is a tough move to finally decide to sell your company. I’m
grateful they chose our company to guide them through the
This is very nice company, strong and growing in its niche market.
We did a full valuation for them based on earnings, but during this
research it became apparent this company is a possible candidate for a
Strategic Sale vs. Cash Flow Sale
By far most of the companies for sale are valued on historical cash
flow (or earnings). That is, the buyer is relying on the assumption
that future earnings will at least equal historical earnings. The
value of the company is usually calculated such that a buyer can afford
to pay themselves a living wage, as well as pay off the debt of
financing the business. Or put another way for larger businesses, pay
a manager and also provide a return-on-investment.
On the other hand, we all know of companies that sold for ridiculous
amounts of money. Sometimes these companies have no earnings, sometimes not even a dime of revenue. Yet they can command millions of dollars and sometimes even hundreds of millions for a purchase.
These are a strategic sale and the buyer is making a
strategic move to fill a hole in the product line, re-position itself,
acquire new technology, defend against competition, etc. Really, it still comes down to
earnings. The buyer is looking down the road and expects the benefits
of the new acquisition will, someday, result in future earnings (or prevent the
erosion of earnings).
My new client has established themselves into a well positioned
niche, and it seems that a larger company would love to own that
market. We think. Maybe. My job is to research the market, contact and engage with
these larger companies.
A strategic sale? I’ll find out by the end of the year … and I’ll let you know.