How to Sell Large Businesses

Selling ‘Large’ Businesses

In the context of businesses sold by professional business brokers, a large business is defined as being worth about $2M-$20M.  This contrasts with the median price of $329K for the average business sale. What sets large businesses apart from small businesses? Often it simply takes time for small business to grow organically, expand their retail footprint or online presence, and gain customer loyalty. Selling a large business invariably involves hiring a business broker who may may properly value the business based on the historical financials, targeting strategically qualified buyers, and undergoing a rigorous due diligence process. Unlike many small businesses, large businesses invariably have a business model which has value-creating components other than the work of the owner. Selling a large business is never selling a ‘job’, which may be the case when selling a small business where the seller’s role is instrumental to the value of the business.

Valuing Large Businesses

A large business tends to have a proven and self-sustaining business model. This lessens risk of impairing future cash flow, which in turn lessens the risk for the buyer and makes the deal more easily financeable by lenders.  Large businesses typically are valued for a higher valuation multiple (applied against its annual profits or adjusted owner benefit) than small businesses as a result. Large businesses worth $2-20M generally have a valuation multiple between 4-6 x the annual adjusted owner benefit. This is a significant premium compared to small businesses (priced between 2-4x) but still well below the valuation afforded to much larger and more complex publicly traded businesses (which trade for about 20 x earnings).  Keys to maximizing the sales price of large businesses include maintaining the confidentiality of the sale and attracting the right kind of quality and strategic buyers.

Maintain Confidentiality of Sale for Large Businesses

When selling a large business in the range of $2-20M, confidentiality of the sale is of critical importance.  Any publicly placed online advertisement (or blind ad) should not disclose the identity of the business, including its specific geographic city, address, pictures, and name. This way, the competitors, suppliers, customers,  employees, and interested observers will not know that the business is for sale. Any prospective buyers must complete and sign a Non-Disclosure Agreement (NDA) and disclose that they have sufficient funds or funding capability to buy the business prior to receiving any confidential listing information. A strong NDA prevents buyers from using any company information for competitive purposes, and requires all communication to go through the broker. Since a large business typically has a large amount of company goodwill that relies on the longevity and continuity of its business operations, a breach in the confidentiality of a potential sale may impair this valuable asset.

Quality Buyers of Large Businesses

  • Many quality buyers of large businesses may also be referred to as financial buyers.
  • This type of buyer purchases a business for investment purposes.
  • Most private equity buyers (or buyers representing an investment group of pooled money) are financial buyers.
  • Businesses in the $2-20M price range often are purchased by private equity groups since they tend to have access to ample capital.
  • These types of investors will often have an exit strategy in mind when they buy the business, with the goal of eventually selling the business for a high return on their investment.
  • Finding such buyers requires well placed advertisements targeting private equity buyers, networking with qualified entrepreneurs, and pricing and presenting the business appropriately (and confidentially) to such buyers.
  • Quality buyers should be well funded with ample liquidity and have knowledge about the industry in which the business operates.
  • Frequently, quality buyers are found from private equity groups or individual investor entrepreneurs who have previously purchased a business in the same industry or expressed serious interest in doing so.
  • Owners of large businesses do not want their time wasted with buyers who lack capital or who are not well versed in their industry.

Strategic Buyers of Large Businesses

In contrast to financial buyers who purchase businesses for investment purposes, strategic buyers are in the same or related industry who acquire companies in order to scale their business while capitalizing on revenue or cost synergies.  Strategic buyers will often pay a premium for large businesses because they realize that the value of the combined company (their current company plus the acquisition target) is greater than the sum of its parts. The combined business may realize cost synergies or savings via greater purchasing power and eliminating cost overlaps. Likewise, the combined company may realize revenue synergies  via expanding their end markets and cross-selling between the two companies’ customers. Both cost and revenue synergies increase the future cash flow of the combined company, which enhances the present value of the business being acquired.

Experienced Business Brokers Sell Large Businesses

While large businesses sell for higher valuation multiples compared to small businesses, careful consideration must be given to selling the business confidentially. Large businesses possess a strong and proven business model, often with well trained managers and staff in place at multiple locations. If the confidentiality of the sale is breached at any point in the sales process, then the business could face major problems. Unhappy staff fearful of losing their jobs because of a potential merger or sale, and customers fearful of uncertainty may lead to serious business disruption. The sales process must always maintain the confidentiality of the sale at all times. Experienced business brokers ensure that a large business sale is handled confidentially while locating qualified financial and strategic buyers.

Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.