How to Get a Big Company Multiple for Your Business
Big public companies trade at a significant premium over small businesses in the same industry because investors perceive big, sophisticated companies as a safer bet than small, owner-dependent companies. So how do you get a public company-like multiple for your business?
One approach is to look for a strategic buyer. Unlike a financial buyer that is looking for a relatively safe return on their capital invested (which is the reason investors place a premium on big, stable companies trading on the stock market), a strategic buyer will value your company on how buying you will impact them.
Let’s imagine you have a grommet business predictably churning out $500,000 in pre-tax profit. These days, a financial buyer may pay you around 4 or 5 times earning – in this case, roughly $2.5 million – if you can make the case your profits are likely to continue well into the future.
Now let’s imagine that a company that sells a billion dollars worth of widgets becomes interested in your grommet business. They think that if they integrate your grommets into their widgets, they can sell 10 percent more widgets next year. Therefore, your little grommet business could add $100 million of revenue for the widget maker next year – and that’s just year one after the acquisition. Imagine what your business could be worth in their hands if they continued to sell more widgets each year because of the addition of your company.
The widget maker is not going to pay you $100 million for your business, but there is somewhere between the $2.5 million a financial buyer will pay and the $100 million in sales that the widget maker stands to gain next year that is both a good deal for you and for the widget maker.
Premium multiples get paid to big companies, and also to the little ones that can figure out how to make a big company even bigger.
