This article are provided for information purposes only, and are not intended as legal advice.


Why is it so difficult to value a business – Part II?

May 21st, 2009

Based on yesterday’s article, we hopefully understand that no two businesses are identical.  There will always differences between companies even if we think that they are identical.  I compared retail stores yesterday, let’s look at wholesalers or manufacturers today.  If we first select the wholesalers, do both wholesalers carry the identical products, unlikely, one may have a different product line or more product lines than the other.  Do both stock the same products or does on always have it in stock so that you can pick up stock but the other wholesaler you need to order 24 to 48 hours in advance.  Is there a pick up counter in case you need something immediately, if one business has one and the other wholesaler does not, which one will get the last minute sales?  Do both wholesalers have multiple locations so that the customer can pickup the goods near their location or do they have to arrange a courier to deliver the goods?  If both deliver goods, will the transportation costs be identical from both suppliers?  Does one deliver 3 times per day and the other is next day service?  If you are an auto parts distributor who only delivers once a day and you get a customer with a car on the hoist in the afternoon, is the car suppose to wait to be fixed until the next day if they can get the parts from someone else?

 

Manufacturers are all different, they own their own products and may be have patented their products.  Do they offer similar products?  Are they the same price?  I am aware of a manufacturer who has one plant and sells product to businesses across North America.  A competitor has 25 plants throughout North America.  One will have considerably higher transportation costs and the transportation could take up to 5 days for delivery but if the client is out of the product today, do they want to wait 5 days? 

 

The purpose of my illustrations is to show that now two businesses are identical, they will have different sales, different customers.  Many companies have the 80/20 rule, 80% of the revenue comes from 20% of the customers.  I have seen significantly different splits, I have seen some companies that have 80% of the revenue from 2 customers and this is extreme economic dependence to others that have two customers that have sales of 10% of revenue and the remaining customers are less than 2% of revenue.  The later company will appeal to more buyers than one with economic dependence.

 

No two businesses are identical even if they appeal to be identical on the surface.


Filed under: Buy a business — Gary Landa @ 10:43 am


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