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Understanding Strategic Buyers

How many times have web business owners asked us, usually in complete confusion, why potential buyers for their business negotiate so hard for a valuation that is 1 times revenue, when they know other web business owners ask for—and get—multiples that are 4, 5, or 6 times revenue… or in some cases much higher.  What gives?

Sellers get genuinely confused. Here is our simple explanation. Some buyers have a purely financial interest in your business, while others have a strategic interest on top of their financial interest. Strategic buyers will often pay a premium above what a purely financial investor will pay.

Financial investors are buying your cash flow. If there is fairly good evidence that your cash flow will grow in future periods that will bump the value of your cash flow. You’ll get a premium from the buyer. The buyer is focused on current and future cash flow.
Financial investors tend to be highly pragmatic, results driven, and tough negotiators.  When sellers try to convince buyers that the web business for sale has great unrealized potential, they usually don’t get very far. Financial buyers tend to discount any non-monetized asset of the business. Their general sentiment is an unwillingness to pay for untapped potential. They’ll pay for financial results… but nothing else.

Strategic investors, on the other hand, value the strategic potential of a business and are ready to pay for it. When Google paid over $1.5B for YouTube, the cash flow of YouTube was negligible. No one would have paid over a $1 billion to buy the cash flow of YouTube. But when Google envisioned the premier video self-publishing site on the Internet falling into the hands of a competitor, they easily justified paying a significant strategic premium.

If you want your web business to attract a selling price that is higher than 1 or 2 times revenue, you need to find a buyer with a strategic interest in what you are selling.

Strategic or industry buyers are also more inclined to pay a premium if they believe they can realize significant synergies between your business and their existing business.

If you are wondering what drives the discrepancy in revenue multiples determining selling price, the biggest difference is the premium that a strategic buyer will pay for core assets crucial to maintaining or sustaining a competitive advantage in the marketplace.

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