What Is A ‘Local’ Business?
Local businesses sell their products or services within a local geographic area . The geographic area of where their customers physically reside is confined to one city or county (such as Palm Beach County). A local business may have more than one location, and may be a very large business, but only sells its goods or services to the local population. Typically local businesses have brick and mortal locations, with a well established and visible presence in the community.
Regional or National Businesses
When selling or buying a business, one should understand whether the business being sold is local, regional, or national. National businesses sell products or services to customers residing throughout the entire country often with locations from coast to coast. Regional businesses typically service customers in at least one state or throughout a large state such as Florida. Regional businesses often have physical brick and mortar locations (or satellite offices) throughout their regional customer service area.
Online Businesses
The ubiquity of online commerce has allowed many online businesses to avoid the need for physical brick and mortar locations. Online businesses service customers throughout the country (or world) as anyone with an internet connection may become a customer. Because their customers are not confined to a local geographic area, online businesses are not generally considered to be local businesses. In reality, however, many online businesses put their search optimization advertising dollars only within local geographic areas, and thus will largely sell their products or services to local customers.
Valuing Local Businesses
- In comparison with national or regional businesses, local business generally receive lower relative valuations.
- At the end of 2022, the price to earnings ratio (P/E) of the S&P 500 (the 500 largest publicly traded businesses in the United States) is about 18.
- This means that buyers (or investors) are willing to pay 18 times the annual profits of these national or regional businesses.
- Local businesses generally are valued for about 2-4 times their annual profits (or owner benefit).
- This is of course a very wide range and the multiple of earnings which buyers are willing to pay may be affected by many factors which weigh on the valuation of any business.
- Such factors includes the growth rate of the business, the location of the business (especially if retail oriented), the leasehold interests of the business, the physical assets (or equipment) owned by the business, the total addressable market of the business and whether this is growing, the margins of the business, the competitive advantages of the business, and the degree to which the ownership is absentee and may be easily replaced.
- Buyers (or investors) generally assign higher multiples to national or regional businesses because such businesses are generally more established with a stronger brand, economies of scale, and a professional management structure in place.
- Any seller of a local business should consult with a professional business broker in order to receive a business valuation specific to their own industry and particular business.
Owner’s Role in Local Business
- A very important part of many local business sales is the degree to which the owner is involved in the day to day operations of the business.
- The higher degree to which a business is an ‘owner-absentee’ business, the higher multiple of owner benefit a buyer will be willing to pay.
- Conversely, the more expense and risk that a buyer will incur for having to replace the owner (with the buyer herself or someone else) in the day to day operations of the business, then the lower the multiple of owner benefit a buyer will be willing to pay.
- Moreover, if the owner of a local business has a personal relationship with customers or vendors, then some buyers may not trust that the customers or vendors will continue their business relationship with the buyer after the sale occurs.
- For many local businesses with active owners, this should be an important concern that should be addressed by the owner prior to putting the business up for sale.
- It is always preferable that a seller de-emphasizes their own role in the business, and remove themselves as much as possible from the day to day operations of the business.
Who Buys Local Businesses?
Any and all types of business buyers purchase local businesses. Even large private equity groups, or institutional buyers who use pooled capital for the purpose of investing in public or private companies, purchase local businesses. Business buyers from out of state, overseas, and of course those who live nearby also buy local businesses. What matters most to buyers of local business is whether they can maintain or increase the cash flow of the business after the sale. The business buyer must believe that they will not lose customers and revenue after the sale by the change of ownership, and that they will be able to operate the business with a similar or lower cost structure.
Selling Local Businesses to Competitors
Competitors of local businesses often make excellent business buyers and generally pay premium prices. Such competitors may be regional or national businesses wishing to expand into a local market. Other competitors may also be local and desiring to dominate the local market. In either case, the merger usually results in synergies which greatly benefits the buyer. Synergies are cost-savings that a buyer benefits from after the sale. This includes eliminating duplicative costs shared by both the buyer and seller, as well as lower supply and raw material costs (with more favorable terms) from better economies of scale. Moreover, competitors usually are already well acquainted with the target acquisition (and industry), which results in an easier, faster, and less costly formal due diligence process for the seller.
Local businesses may be any size imaginable but confine themselves to selling their products or services to customers within a local geographic area. Sellers of local businesses should be advised by a professional business broker as to the correct valuation of their business, along with how to implement the best strategy so that the business sells for the highest price possible.
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.
