The most obvious and most common reason is cash flow; but cash flow alone is seldom the sole reason people buy small businesses. Usually there are many reasons, but they are almost always in these few areas:
Cash flow is the number one consideration. The amount is important but the quality of the cash flow makes a significant impact on its value. Buyers will pay more for highly predictable cash flow from long-term contracts, subscriptions, or maintenance agreements than for less dependable, one-time sales. A significant price-booster for a small business is to develop more a more predictable revenue stream.
Market Share impacts business value: A new entrant into a business segment will generally pay more for a dominant market position. More frequently, however, is a competitor looking to both increase his/her market share and remove a competitor. Often a competitor can and will pay more for a business because its fixed costs can be spread over greater revenue – effectively increasing profit margins.
Strategic Advantage is not often as big a factor in small business transactions but can have a major impact in some situations. National or regional companies look to both enter or expand into certain markets and at the same time foreclose their competitors out of those markets. Your company may have a patent or trade secrets that are cheaper to buy than replicate or work around. Similarly, your company may have a long-term relationship or long-term contract with a key customer that a buyer may value highly.
The expression “Cash is King” is certainly true in the world of small business transactions; but cash flow alone is seldom the sole interest of the most motivated buyer. The Pulliam Company can assist you in identifying those elements of your business create the most value.