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By Nathan Rose, Assemble Advisory
Selling a venture as a going concern is one thing, but in some cases an acquirer only wants a specific asset within your business. With land and buildings, a property valuer can provide a starting point for negotiations, but valuing other assets can be far trickier. How do you determine a valuation for a customer list? I am reminded of a quote of Seth Godin's: "People give you money because they think the value you can provide them with is worth more than it costs".
Now, Seth was talking about selling cups of coffee (he is a marketing guy, after all). But this concept is just as applicable to selling entire companies: the acquirer wants to gain more from the deal than the cash they spend. Simple, but worth bearing in mind in your negotiations.
The best way to proceed, then, is to try to determine the value the acquirer may gain from your customer list, and work backwards from there to determine a valuation. Ideally, this will be a collaborative process where both you and the acquirer are open with one another.
Building a customer list is hard work - in many cases, years of advertising, negotiating, and building trust. By acquiring your customer list, the acquirer is hoping to skip all of this. If you can glean what the acquirer is paying in sales and marketing efforts for each customer they currently get, it will be a great starting point for valuing your list. A simple illustration: if the acquirer is happy to spend $100,000 to gain 100 customers, then they should also be happy to pay $50,000 if you can deliver 50 similar customers to them
If the acquirer is happy to pay $100,000 to gain 100 customers, then they should be gaining some value in excess of this in order to be profitable. "Long-term value of customers" simply means the worth of a customer over the years (like a mini-discounted-cash-flow for a customer) - factoring in expected income from the customer over the years, the retention rate, and how long it takes to recover what was spent upfront in order to get that customer in the first place.
Note, continuing the spirit of focusing on what the customer list is worth to the acquirer (rather than to you), try to use their long-term value numbers - these could be substantially different from your own, due to the acquirer having processes that retain customers for longer, allow them to provide the product at a better margin, and so on.
Just because you have 50 customers doesn't mean the acquirer will be able to keep them all. Some businesses will be easier than others to migrate customers from seller to acquirer. The more your business is process-driven and independent of specialised customer service, the better. The customers of a hairdresser are going to be harder to transfer to an acquirer than, say, garbage collection. Hairdressing clients are loyal to the person who cuts their hair, and such individual relationships are difficult to pass on to somebody new. As for garbage collection, as long as the acquirer keeps picking up the trash on time, most customers will likely stay (and probably not even notice the change in ownership).
Not all of your customers are equal. Selling all 50 customers at an "average" price ignores their individual characteristics. Your list may consist of 5 very large customers who make up 50% of your income, 15 smaller customers who make up a further 40%, and 30 relatively inactive customers who make up the final 10%. Valuing the customers in more detail is much more rigorous, and hence credible.
To conclude, I want to return to the Seth Godin quote: "People give you money because they think the value you can provide them with is worth more than it costs"
There are two messages embedded within this. The obvious message is to determine value based on what it is worth to the acquirer.
The less obvious message is underlined: You must communicate and convince a buyer of the value before they will be willing to buy.
When selling cups of coffee, value is communicated by branding and the quality of the brew.
When selling companies, value is communicated by well-constructed financial analysis under reasonable assumptions.
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