Putting early emphasis on the exit route Trade sales make for good prices, but they take more work and more understanding of buyers’ businesses and their motives.

It may be no surprise that the prices paid by buyers of private businesses reflect what as buyers they can make out of the business rather than its book value.

Analysis of their work by BCMS, the largest seller in the UK of private businesses shows that by far the main reasons for acquiring a business is that it represents a new service, skill or technology, a new customer base, or a geographical expansion. Financial investment is very rarely the reason.

Moreover, buyers are rarely to be found among competitors and businesses in the same field; they tend to be from adjacent fields, and making unexpected synergies with the seller.

The nostrums that they offer are two: get competing buyers into the ring, and look at the value of your business in terms of what the buyer is likely to be able to make of it, rather than its historical value.

BCMS’s approach is to spend a substantial research effort in finding possible candidates – often up to a couple of hundred, and then sifting through them to arrive at a small number of serious contenders, before inviting bids. The lowest bids tend to be around a conventional multiple of profit, and the highest as much as two and a half times greater.

If these morsels of wisdom are applied to the field of early-stage businesses, you would be looking extensively and very early on in your business’s life at the fields in which your product or service can add value; and at how possible buyers in those fields have made use of such synergies in the past.

That means that you would be looking for a buyer who had some experience and understanding of the technology involved and the fields of its potential application rather than a financially based venture capital company. And you would be looking to meet several of them. And that probably means knowing the whole field.

Those who have the vision to see a new potential application for a young business’s product or service are those who will turn the price for it into an interesting multiple.

John Whatmore, June 2016