Strategic value is where a buyer can make more from a business than it would have otherwise realised, and is the gravy that makes an otherwise square meal a picnic. By TOM McKASKILL
By Tom McKaskill
If you have some unique underlying assets or capabilities, you might be able to get a premium on sale if you sold to a strategic buyer. But, the key question is – what is your strategic value worth?
Strategic value is created when a buyer extracts greater value from the acquisition than can be provided by the inherent profit generating resources of the business being acquired. That is, the buyer is able to generate greater profits than those which the acquired business is able to achieve, or could achieve, in the future if it continued as a stand alone business.
The stand alone value of a business can be calculated by working out the net present value of the future stream of earnings which the business in its own right could generate. Any premium paid above this by the buyer is considered to be the value of the strategic value of the business.
Strategic value is created when the buyer utilises the assets or capabilities acquired to produce profits through the buyer’s organisation, which may mean cross selling to their customers or distributing the acquired products and services through their own distribution channel.
Other forms of strategic value accrue when the buyer is able to take costs out of the acquired company by merging activities or by leveraging their brands or unique processes in the newly acquired business.
The problem the vendor has is to figure out if a strategic premium is possible and then to work out what size the premium might be. Sometimes this is relatively straight forward and other times it is pure guess work.
For example, calculating what revenue and profit your product or service might generate in a much larger customer base or distribution channel when you have good data on take up rates might be relatively easy. But working out what contribution your incomplete technology might have is problematic.
Sometimes you can look to equivalent deals to see how large corporations have valued similar contributions. This has generally proved to be useful with recent acquisitions of internet community businesses where a price can be estimated per member.
In the end, it really comes down to two factors. First, are you certain that you can generate a price for your business above the value which could reasonably be calculated from its inherent future earnings, in which case you are better off with a strategic buyer.
Secondly, you need to ensure you have multiple buyers competing in the deal. Smart buyers will be able to undertake their own calculations of the strategic value of your business. Let them fight it out for the privilege of taking it to market.
In several of the businesses that I sold, I was clearly generating a sales price well above the fair market value of the business based on its going concern value. All I had to do was to ensure I had a number of potential buyers who could exploit the full potential of the business and let them push the price up through the bidding process.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.
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