The Impact of Special Interest Purchasers on Business Valuation

"Special interest purchasers" can have a significant impact on the valuation of a business, driving up its price and allowing business owners to achieve a higher return on their investment. But what exactly are special interest purchasers, and how do they impact business valuation? In this blog post, we'll explore the power of niche markets and how special-interest purchasers can influence business valuation. Through real-world examples in industries such as restaurants, regional banks, and application software, we'll provide insights into sharing resources, gaining a foothold in new geographic regions, and other strategies that can be employed to attract potential acquirers. Along the way, we'll discuss the benefits of business valuation software and how it can identify potential acquirers and calculate a fair market value for your business. As Tamir Levy, Ph.D., Founder-CEO of Equitest, says, "Special interest purchasers can play a significant role in maximizing the valuation of a business. Understanding their motivations and strategies is essential to achieving a successful acquisition for your business."

What Are Special Interest Purchasers?

special interest purchasers are acquirers who see value in combining the acquired business interest with their own. This can be for a variety of reasons, such as post-acquisition economies of scale, synergies, or strategic advantages.

Post-acquisition economies of scale refer to the cost savings that can be achieved by combining two businesses. By merging operations, the new entity may be able to eliminate redundancies, streamline processes, and reduce costs. This can result in increased profitability and value for the acquirer.

Synergies refer to the benefits that can be gained by combining two businesses that are complementary to each other. For example, a company that produces computer hardware may acquire a company that produces software, allowing the new entity to offer a complete solution to customers. This can lead to increased revenue, customer loyalty, and value for the acquirer.

Strategic advantages refer to the benefits that can be gained by acquiring a business that provides a competitive advantage or fills a gap in the acquirer's portfolio. For example, a company that specializes in e-commerce may acquire a business that has a strong brick-and-mortar presence, allowing the new entity to reach customers through multiple channels. This can result in increased market share, revenue, and value for the acquirer.

In summary, special interest purchasers are acquirers who believe they can gain value by combining the acquired business interest with their own. This can be achieved through post-acquisition economies of scale, synergies, or strategic advantages, all of which can positively impact the valuation of the business.

Examples of Special Interest Purchasers in Three Different Industries

Here are three examples of special interest purchasers in different industries:

1. Restaurants Industry: Imagine a successful fast-casual restaurant chain that has a loyal following of health-conscious customers. A special interest purchaser in this case could be a larger restaurant group or private equity firm that has a portfolio of similar health-focused restaurants. By acquiring the fast-casual chain, the purchaser could enjoy post-acquisition economies of scale by sharing resources and streamlining operations. They could also benefit from synergies by cross-promoting the chain's healthy offerings with those of their other restaurants.
2. Regional Banks Industry: A regional bank that has built a strong presence in a particular geographical area could be attractive to a special interest purchaser looking to expand into that market. For example, a larger national bank may see value in acquiring a successful regional bank to gain a foothold in a new geographic region. The purchaser could enjoy strategic advantages by leveraging the regional bank's established customer base and local expertise, as well as benefiting from economies of scale by merging operations and eliminating redundancies.
3. Application Software Industry: A software company that has developed a cutting-edge application in a niche market could attract a special interest purchaser that operates in a related industry. For example, a healthcare technology company may see value in acquiring a software company that has developed an application to help medical professionals manage patient data. The purchaser could enjoy strategic advantages by offering a comprehensive solution to their customers, as well as benefiting from synergies by integrating the acquired software with their own products and services.

The Example of the Restaurants Industry

Let's say a private equity firm acquires a successful fast-casual restaurant chain that specializes in healthy, plant-based meals. The firm also owns several other health-focused restaurant chains. By acquiring the fast-casual chain, the private equity firm could share resources and streamline operations to achieve post-acquisition economies of scale.

For example, they could:

1. Share supply chain resources: The private equity firm could negotiate better pricing with suppliers by consolidating purchasing across all their restaurant chains. They could also use their purchasing power to source high-quality ingredients at lower prices.
2. Standardize processes: By standardizing processes such as menu development, procurement, and training, the private equity firm could reduce costs and improve efficiency. They could also ensure consistency in the customer experience across all their restaurant chains.
3. Consolidate administrative functions: The private equity firm could consolidate administrative functions such as accounting, HR, and IT across all their restaurant chains. This would reduce costs and improve efficiency by eliminating redundancies and reducing the need for multiple teams to manage similar functions.

By sharing resources and streamlining operations in these ways, the private equity firm could improve the profitability of the fast-casual restaurant chain and increase its overall value.

The Example of the Regional Banks Industry

Let's say a large national bank based in the United States wants to expand its operations into Canada. While the bank has a strong presence in the US, it has no existing operations in Canada. One way for the bank to gain a foothold in the Canadian market could be to acquire a successful regional bank based in Canada.

By acquiring the regional bank, the national bank could benefit from several advantages:

1. Established customer base: The regional bank likely has an established customer base in the Canadian market. By acquiring the bank, the national bank would gain access to this customer base and could start marketing its products and services to these customers.
2. Local expertise: The regional bank likely has employees who are familiar with the Canadian market and have established relationships with local businesses and individuals. By acquiring the bank, the national bank could leverage this local expertise to better understand the Canadian market and tailor its products and services to meet the needs of Canadian customers.
3. Infrastructure: The regional bank likely has an existing branch network, technology infrastructure, and back-office operations in place. By acquiring the bank, the national bank could avoid the cost and effort of building these infrastructure from scratch, and could instead use the existing infrastructure to quickly establish a presence in the Canadian market.

By acquiring a regional bank in Canada, the national bank could gain a foothold in a new geographic region and position itself for long-term growth and profitability.

The Example of the Application Software Industry

Let's say a large application software company that specializes in customer relationship management (CRM) software wants to expand its product offerings to include human resources (HR) software. However, the company has no existing HR software products and no expertise in the HR software market. One way for the company to quickly gain expertise and market share in the HR software market would be to acquire a successful HR software company.

By acquiring the HR software company, the application software company could gain several benefits:

1. Access to HR expertise: The HR software company likely has employees who are experts in HR software development and who understand the needs of HR professionals. By acquiring the company, the application software company could leverage this expertise to develop high-quality HR software products that meet the needs of its customers.
2. Cross-selling opportunities: The application software company likely has an existing customer base that uses its CRM software. By acquiring the HR software company, the company could cross-sell its HR software products to its existing customer base, thereby increasing its revenue per customer.
3. Synergies in product development and marketing: The application software company could also achieve post-acquisition synergies by combining its product development and marketing resources with those of the HR software company. By sharing resources, the companies could develop new products more quickly and market them more effectively, thereby increasing their competitive advantage in the market.

By acquiring a successful HR software company, the application software company could quickly gain expertise in a new market and expand its product offerings, which would ultimately increase its value to shareholders.

what is The Impact of Special Interest Purchasers on Business Valuation of the acquired firm?

Special interest purchasers can have a significant impact on the business valuation of the acquired firm. Because special interest purchasers are often motivated by the potential synergies, economies of scale, or strategic advantages they believe they can achieve by combining the acquired business with their own, they are often willing to pay a premium for the business.

This premium can drive up the valuation of the acquired firm, resulting in a higher purchase price for the seller. For example, if a large retail chain acquires a smaller, successful online retailer, the larger chain may be able to achieve post-acquisition synergies by leveraging its existing distribution network and customer base to expand the online retailer's reach. As a result, the larger chain may be willing to pay a premium for the online retailer, driving up its valuation.

On the other hand, if there are no special interest purchasers for a particular business, the valuation of the business may be lower. For example, if a small manufacturing company has no potential acquirers who could achieve synergies by combining the business with their own, the valuation of the business may be lower than it would be if there were potential acquirers interested in the business.

In summary, the impact of special interest purchasers on business valuation can be significant. Business owners and professional valuators should be aware of the potential impact of special interest purchasers on the valuation of their businesses and should take this into account when determining a fair market value for their businesses.

Conclusion

In conclusion, special interest purchasers can be a powerful force in the world of business valuation. Acquirers who believe they can enjoy post-acquisition synergies, economies of scale, or strategic advantages by combining the acquired business with their own can pay a premium for that business, driving up its value.

As a business owner or professional valuer, understanding the potential impact of special interest purchasers on the valuation of your business is crucial. By analyzing your business's unique characteristics and identifying potential acquirers who could benefit from those characteristics, you can position your business to achieve a higher valuation.

One way to do this is by using business valuation software, which can help you analyze your business's financials, identify potential acquirers, and calculate a fair market value for your business. By using business valuation software, you can gain a better understanding of your business's worth and position it to attract the attention of special interest purchasers.

So, whether you're a business owner or a professional valuer, consider using business valuation software to help you understand the potential impact of special interest purchasers on your business's value. By doing so, you can better position your business for long-term success and profitability. Schedule a demo here.