Industry/Market Factors
7 Industry/Market Factors
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Consolidation Stage
The stages of consolidation vary by industry. Buyers like businesses in fragmented markets that are undergoing consolidation. The reason is that there are opportunities to purchase smaller competitors to achieve economies of scale. The buyers that typically pay the highest prices are strategic buyers. This is because they can eliminate costs that are duplicative. Business owners may not prefer the strategic route since ‘elimination of duplicative costs’ means some of the existing employees are going to lose their jobs. A consolidating industry environment is still positive as it forces all buyers to pay more. An owner doesn’t control this factor but it’s good to be aware of it.
Industry Outlook
This is another factor largely out of control of the business owners. If the outlook for future growth in a particular industry is dark based on external forces, it may be time to reinvent the business model. Political considerations come into play. Market forces are in play. An example for our time is the cruise ship industry. People will take cruises again. But when? And if you’ve ever been on a cruise, you know how close quarters are. What will things look like when cruises return?
Opportunities for Growth
Buyers want to see that the current owners have growth opportunities identified. They should be feasible, significant, and based on available data. It’s highly attractive to see that there are plans in place to capture these growth opportunities.
Availability of Industry Data
You can’t evaluate a business fully if you can’t find good data. Readily available information from industry associations or business press is a positive for buyers. They’re looking for growth projections, industry trends, and competitors. Otherwise attractive companies in markets that are so highly specialized as to lack data may receive some discount to the value.
Barriers to Entry
Naturally, companies that have high barriers to entry are attractive to prospective buyers. They make it difficult for new competitors and protect the company’s revenue. Examples could include industries that require high investment capital to enter, patents, brand names, reputation, or specific expertise.
Market Position
Attractive companies have a strong market share or a protected niche in the industry. A well-known brand name and excellent reputation is the culmination of doing many things right. Buyers are willing to ‘pay up’ for these kinds of companies that have strong social capital.
Product/Service Obsolescense
The early 1900s probably wouldn’t have been a great time to buy a horse and buggy company. The long-term outlook was not good due to the advent of the automobile. Similarly, market forces can be a strong headwind to some product and services businesses. Whether an industry is facing obsolescence or global competition is going to be carefully considered by a buyer evaluating a company for purchase.
