What makes one business worth more than another?

What makes one business worth more than another?

The second business is owned by a technical expert in electronics and is distribution-based. The owner is in his 70s and wants to sell, but the valuation I placed on the business is some way short of his expectations. In fact, it will be very difficult to sell because it’s highly reliant on the technical knowledge of the owner and his sales manager.

The third business, owned by two equal shareholders, is a distribution business operating in a niche market. Similar to the electronics business, the owners sell by providing technical expertise to a wide range of blue-chip names.  This business will be an attractive proposition, even though it is similar in size to the second business and equally reliant upon the owners’ skills.

The difference between the software business with its long-term contracts and geographic spread and the two distribution businesses is pretty clear.

The difference between the two distribution businesses – both of which have excellent connections and certifications, one in aerospace, the other in heavy industry – comes down to their profitability.

One business has a gross margin of about 20%, but the other achieves a margin above 30%.

The business that’s only making 20% is not being rewarded for the technical expertise they tell me they are supplying. If they are really solving customer problems, they should be rewarded for that – in just the same way as I am seeing rewards in the financial results of the other business.

Bear in mind - the main reason someone will buy your business is in the knowledge that similar profits will be generated under their stewardship. What you have achieved is a guide to what they can achieve.

 

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Author: Tim Luscombe

Hello, I'm Tim and I'm a specialist in corporate finance for the owner managed business. If you've been approached to sell your business, or you are thinking of buying a business or you just want to know what your business ...