Confessions of a Do-It-Yourself Business Seller
How selling his company on his own stole some of this business owner’s joy – and financial gain – from what should have been his crowning achievement.
3 min read
When marketed to the right type of buyer, a low-margin business that is consistently profitable and offers a broad customer base should bring top dollar.
By Robert Latham, M&AMI, CBI
IBG Business (Texas/Arizona)
A key measure of business value is EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. Despite its broad acceptance as a reliable indicator, many business buyers unfairly impose a built-in bias against companies with EBITDA profit margins below 20%, commonly known as “low-margin businesses.”
While that bias can be discouraging to a would-be seller, overcoming it is one of the key ways that the M&A brokers at IBG Business bring value to a successful sale. In fact, from our standpoint, marketing a business in a low-margin industry actually shortcuts the process of identifying potential best-fit buyers. Here’s how.
Likely Buyers. A recent IBG article describes three main types of business buyers: individual buyers, strategic buyers, and financial buyers. While seven out of 10 deals handled by IBG involve financial or “professional” buyers, that ratio shifts significantly when the subject business is in a low-margin industry, as financial buyers tend to prefer businesses with EBITDA profit margins of 20% or more.
For a low-margin business, the most likely prospect is a strategic buyer – an established company that is actively engaged in the same industry (i.e., a competitor) or a related industry (perhaps a supplier) and sees the acquisition as a way to achieve a strategic or synergistic objective.
Strategic buyers might be attracted to complementary companies where there is little overlap, that offer one or more product lines that the buyer can sell to its existing customers, and, vice versa, that have customers to which the buyer can market their current lines.
Equally important, many buyers of low-margin businesses are, themselves, low-margin businesses. They know the industry, understand that low margins are typical of the industry (and not a company weakness), live with those margins on a regular basis, and appreciate the value of a company that grosses, for example, $20 million a year and consistently makes $1.5 million to $2 million. Also, strategic buyers are less likely to approach an acquisition with a high degree of leverage, which can mean more cash to the seller when the deal closes.
Buyers that fit that profile can be identified and vetted, allowing us to target-market the subject business to pre-qualified prospects that would benefit from a strategic acquisition.
DISTINGUISHING QUALITIES
Here are some common – and valuable – traits of low-margin businesses:
WE UNDERSTAND YOUR BUSINESS
With a track record of more than 1,100 successful closings, at an 86% closing rate (three times the M&A industry average), IBG Business is well-equipped to help you be fully prepared for the successful sale of your profitable business, regardless of where it resides on the EBITDA profit margin scale.
To start the process of marketing your company to a best-fit buyer who appreciates its value, contact an IBG Business M&A professional near you.
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