Is bigger better?

Get your mind out of the gutter! This is LinkedIn people and we are here for business, and when it comes to selling a business, it is a fact that bigger really is better. Better why? Better because bigger businesses attract higher profit multiples, but why?

Diversity of customers and revenue streams

Small businesses might be reliant upon a handful of customers and a handful of products. If the business loses these customers or products due to competition, business failure or the emergence of new technologies then there is a high degree of risk that the business’ performance will be negatively impacted. With large businesses, the impact of a loss of a single customer or revenue stream is likely to be immaterial, therefore larger businesses represent a lower risk to acquirers and therefore attract a higher value.

Economies of scale

The more you buy, the cheaper the price, the more profit you make. Bigger businesses tend to be more profitable as they are able to make more efficient use of their resources and therefore attract higher valuations.

Brand recognition

The larger the company, the larger its reach and level of brand recognition. This is great for marketing but it also enables businesses with recognised brands to expand into new markets with lower barriers to entry than smaller (and therefore less valuable) businesses with less well recognised brands.

More management and staff

Often with smaller businesses, if you remove the one or two key people of influence within the business then the likelihood of that business being able to continue trading at the same level is low. As such, this would represent a significant risk to a potential buyer and this is reflected in the valuation. Larger businesses with larger management teams are less reliant upon key staff and are therefore less risky and hence more valuable.

Access to finance

Larger businesses have access to more financial institutions and products than smaller businesses. Again, this come down to the lenders perception of larger businesses being less risky so are willing to lend them more money via a larger range of financial products. It can therefore make it easier to raise debt to acquire a larger business than for a smaller one which will impact the target’s value in a positive way. ?At the higher end of the scale, larger businesses are also able to list on the stock market which is a huge source of funds. ?

About the Author

Having previously worked as a Charted Accountant in Corporate Finance before running and then selling his family business, Daniel is now building a portfolio of businesses through acquisition. Typical target companies are in the manufacturing and wholesale sectors with turnovers of between ￡1 and ￡5m.

If you want to discuss selling your business, or know someone who does, you can contact Daniel via LinkedIn.