Strategic value is the value a purchaser is willing to pay for a business, over and above what an impartial business valuer might determine is ‘fair market value’. How much more a purchaser will pay for strategic value is largely determined by their individual circumstances, but it can also be influenced by the vendor’s management decisions long before sale time. In this eBook JPAbusiness managing director James Price discusses: What is strategic value in a business sale; How competitive advantage contributes to strategic value; How the market determines strategic value; How to create strategic value in your business.

1. Strategic value in
a business sale
What is it, why pay for it and how do I create it?

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Table
of
Contents
Chapter
1:
What
is
strategic
value
in
a
business
sale?
............................................
3
How
is
strategic
value
created?
...................................................................................................................
4
Competitive
advantage
.....................................................................................................................................
4
Business
characteristics
...................................................................................................................................
5
Complementarity
.................................................................................................................................................
5
‘X’
factor
...................................................................................................................................................................
6
Chapter
2:
How
competitive
advantage
contributes
to
strategic
value
...................
8
How
to
achieve
a
competitive
advantage
................................................................................................
8
Barriers
to
entry
..................................................................................................................................................
9
Operating
systems
...............................................................................................................................................
9
Exclusivity
............................................................................................................................................................
10
How
competitive
advantage
can
be
eroded
.........................................................................................
11
Chapter
3:
How
the
market
determines
strategic
value
.........................................
13
Complementarity
–
when
the
stars
align!
.............................................................................................
13
Buy
versus
build
...............................................................................................................................................
14
How
much
will
the
market
pay?
................................................................................................................
15
Quantifying
strategic
value
..........................................................................................................................
17
Who
pays
for
strategic
value?
.....................................................................................................................
18
Chapter
4:
How
to
create
strategic
value
in
your
business
.....................................
20
The
JPAbusiness
Strategic
Value
Checklist
...........................................................................................
21
Disclaimer: The information contained in this eBook is general in nature and should not
be taken as personal, professional advice. Readers should make their own inquiries and
obtain independent advice before making any decisions or taking any action.

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Chapter 1: What is strategic value in a
business sale?
Comments by James Price
JPAbusiness Pty Ltd
Strategic value is the value a purchaser is willing to
pay for a business, over and above what an
impartial business valuer might determine is ‘fair
market value’.
As we have discussed in previous eBooks, one common method of
determining a business’ fair market value is to use a multiple of earnings.
Multiple of Earnings is the term for how many years or months a purchaser is
prepared to wait before they recoup the value they paid the outgoing business
owner, based on an assessment of business maintainable earnings (or
sustainable earnings).
In Australia’s small to medium-sized business market, purchasers are
generally looking from one, to four and a half years, to recover the money
they’ve invested.
So how much more than its fair market value will a purchaser pay for a
business with strategic value?
The answer is largely determined by the potential purchasers’ individual
circumstances which impact their appetite for the opportunity, but it can also
be influenced by the vendor’s management decisions long before sale time.

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How is strategic value created?
There are a number of factors which contribute to a business’ strategic value.
These include:
• Competitive advantage –
This is what you as a
business do better than
anyone else and which
another business can’t easily
or quickly replicate.
• Business characteristics –
These characteristics – which include customer diversity and brand
strength – are largely quantifiable and can be influenced by a business
owner’s management decisions and actions.
• Complementarity – This is the extent to which the business’ offering
complements a potential purchaser’s business, or their investment and
strategic objectives.
• ‘X’ factor – This is the qualitative side of the equation and comes down
to whether or not the business opportunity prompts a positive emotional
response in a potential purchaser.
Competitive advantage
Competitive advantage is determined by the strength of the value
proposition you are providing to customers i.e. are you as a business
meeting hitherto unmet needs of customers and how hard is it for your
competitors to quickly replicate your offering?
We’ll examine competitive advantage in more depth later, as it is significant
contributor to strategic value.

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Business characteristics
These business characteristics can usually be counted on to lead to an
enhancement or detraction from strategic value, and many of them can be
influenced by the business owner, to a greater or lesser extent.
They include:
• Customer base diversity
• Supply contracts certainty
• Brand strength
• Point of difference
• Team capability
• Established processes
• Ownership of trademarks, patents, licences etc.
• Market pressures
• Customer expectations
• External advancements
At the end of this eBook we have included a checklist of business and
industry characteristics which influence strategic value, plus some ideas
to help you manage them so as to grow your business’ potential strategic
value.
Complementarity
Complementarity is the extent to which
a business’ offering complements a
potential purchaser’s business, or
their investment and strategic objectives.
For complementarity to occur, a sale
opportunity needs to offer something to
a potential purchaser that they don’t
already have, or which will significantly
strengthen their own value proposition,
beyond the benefits of organic
growth.

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In many respects the market dictates whether there is strategic value or
not, and this is definitely the case when it comes to complementarity.
Here’s an example:
You are a business owner.
Over the years you have worked hard to establish and maintain great
relationships with your customers.
You believe these strong customer relationships will offer strategic
value to a potential purchaser, over and above fair market value.
Along comes a potential purchaser.
This potential purchaser operates in the same industry as you, in the
same geographic location, selling another product to the same
customers.
In this situation your ‘strong customer relationships’ don’t necessarily
complement the potential purchaser’s business, instead they simply
replicate it.
If, on the other hand, you also have the exclusive distribution rights for
a product line the potential purchaser would love to get their hands on,
you have complementarity and a case to argue for strategic value.
‘X’ factor
I like to describe strategic value as being the X factor associated with a
business.
Think about the X Factor TV program. It features a number of different
performers who can all sing, dance and so on to a high standard, but the
ones with ‘X’ factor give more than just a great performance. Somehow
they have a ‘vibe’ that connects with the audience.
Strategic value is like that in business.

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‘X’ factor – it’s the vibe
I’m a bit of a motorcycle tragic and last month I was lucky enough to attend
the MotoGP at Phillip Island.
While perusing the motorcycles on show I was interested to read some
promotional material about Yamaha, which happens to be celebrating its 60-
year anniversary.
Here’s a little extract:
For 60 years, the Yamaha Motor group has created innovative high-
quality and high-performance products that empower our customers by
bringing greater joy to their lives. This is the essence of Kando. Kando
is a Japanese word for the simultaneous feeling of deep satisfaction
and intense excitement that people experience when they encounter
something of exceptional value.
Kando is an emotional reaction to an objective offering.
There is no telling what will produce that feeling in some people and not
others, but it is just that sort of visceral, emotional reaction that causes some
people to value a business (or product) more highly than others.
Strategic value is – at least in part – an emotional value. It’s not fully
quantifiable.

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Chapter 2: How competitive advantage
contributes to strategic value
Comments by James Price
JPAbusiness Pty Ltd
As we discussed in the previous chapter, competitive advantage occurs when
you as a business do something better than anyone else and it is hard for
other businesses to quickly and easily replicate that offering.
There are degrees of competitive advantage and, in terms of strategic value,
your competitive advantage has to be something a potential purchaser
will value.
For example, you may say ‘we
sell more air conditioners than
anyone else because of our
unique customer relationship
management approach’.
That’s great, but are you
achieving reasonable margins on
those sales? If the answer is ‘no’,
there is no value being created,
strategic or otherwise.
How to achieve a competitive advantage
Competitive advantage can be achieved by a number of different means,
including:
• barriers to entry
• operating systems
• exclusivity.

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Barriers to entry
I like to use the following example as a way of explaining how a barrier to
entry can create a competitive advantage:
Think about the early days of Sydney’s establishment. I’m sure there
was a time when there was only one wharf at Botany Bay. It may have
been a natural deep-water port, or it may have been dredged, to allow
ships to come in, unload their cargo, load local merchants’ cargo for
export, and so on.
In the early days that port would have been controlled by one group of
people and the economic rent paid by everyone using that port went to
that one group.
Making another deep-water port would have taken significant dredging,
time, building materials and so on that would have required a large
capital expenditure before anyone saw a return.
So you can see there was a ‘barrier to entry’ in that circumstance which
gave the port’s owners a competitive advantage.
You could do a quantitative assessment of the port’s value, based on rents
received, but the true market value was likely to be larger than the actual
business value because of the competitive advantage.
One facility, effectively a monopoly – an extreme example of competitive
advantage.
Operating systems
There are a number of well-known franchise firms, McDonald’s for example,
that deliver competitive advantage through a very templated, structured and
robust system of product delivery.
This highly structured and successful operating system is hard for
someone going into the hamburger market today to easily mimic,
because it requires an enormous capital investment to put such a system in
place.

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This doesn’t mean McDonald’s dominance can’t be challenged, but
competitors would usually try to challenge in a different way, rather than
trying to replicate its method of delivery.
Exclusivity
The ownership of patents or exclusive product distribution licences also
provide competitive advantage.
For example, the popular herbicide glyphosate entered the chemical market
as Roundup in the 1970s, with Monsanto retaining the patent until 2000.
During that time Monsanto would have had systems in place to catch the
strategic value created by that patent, such as restricting distribution to select
agents and managing supply and pricing to the market.
While Monsanto can still claim some strategic value from Roundup’s brand
strength, its strategic value due to exclusivity has largely been eroded,
with the patent’s expiration meaning many companies now market
glyphosate-based products.

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How competitive advantage can be eroded
Competitive advantage is a key element of strategic value but it’s important
to understand it doesn’t stand still; it’s always impacted by what the
market is doing.
A business owner could be doing something they have done very well for
many years, and suddenly the market around them will change and what was
previously of value no longer is.
Here’s an example:
Imagine you are a business owner with a video rental business.
Over the years you have been highly successful because of the service
and retail model you have developed.
You have 25 video rental stores throughout metropolitan and regional
NSW and you have 40% of the market share of video rentals.
You have all the major titles plus licences to various US early release
material that no one else has.
Your geographic spread, subsequent customer diversity, successful
operating system and exclusivity agreement represent a competitive
advantage and strategic value to a potential purchaser.
Then along comes internet streaming of movies.
Suddenly, over a period of two years, your customer traffic is reduced
by 20% a year.
You have 25 retail leases burning a hole in your pocket and suddenly
your competitive advantage and strategic value are gone – through no
real fault of your own.
This is a fictitious example, but it shows how you can be doing something
well today, but it won’t necessarily be of value into the future.
Some would argue the video retailer should have thought more about where
their market was going, anticipated the change that was coming and its
impact on their competitive advantage, and acted sooner.

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Often this comes down to that old question: as a business owner and
manager, should you spend your time in the business or on the business?
Business owners who focus more closely on the business usually look at
emerging trends, opportunities, changes and issues, and plan and make
adjustments accordingly.
This is good practice because, when you’re building and running a business,
you want to ensure your hard work and investment delivers value along the
way, but also when you look to exit.

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Chapter 3: How the market determines
strategic value
Comments by James Price
JPAbusiness Pty Ltd
Complementarity – when the stars align!
We recently sold an environmental services business. It was an owner-
operated family business, less than 10 years old, with roughly $5 million
annual turnover. It had been built with a very specific focus on particular
markets and had very strong customer relationships.
One of the parties interested in this business was a larger conglomerate
environmental services business with outside investors and equity.
It was looking to build a portfolio of like businesses across various service
propositions in the environmental sector, with a view to potentially listing the
business down the track.
The business we sold had a fair market value based on traditional market
multiples. The price eventually paid by the large conglomerate, however,
included a substantial increment over that fair market value.
The reason it paid
above market value
was that the purchaser
saw the business as
operating in markets
it didn’t operate in,
but needed to get a
foothold in to develop
its business model
across those service
areas.

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There was what I call a ‘time and place opportunity’ because the acquirer
needed something and this business provided it.
The purchaser believed the business was worth a lot more to them than it
might have been worth to others.
In this case the stars really lined up for the vendor and purchaser. When this
happens we find the market might pay 10, 15, 20 and up to 30% above
what business valuers like us would consider fair market value.
Plus a little X factor
In the case of the environmental services company, above, the buyers
included private equity investors who you would assume would be very
analytical and fact-based in their decision making.
To be honest though, I believe there was an element of intangible value
(emotion) involved in the purchase.
They wanted it so they paid what was necessary to get it.
Beauty, as they say, is definitely in the eye of the beholder.
Buy versus build
One way of quantifying a
business’ strategic value, at
least to some degree, is to
consider the buy versus
build scenario.
Ask yourself: ‘If I was to buy
this business, what
additional value over and
above the fair market value
would I get and could I
achieve that same value simply by growing my own business?’

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Often as business valuers we will determine a fair market value for a client’s
business and then subsequently be involved in selling that business.
In general we find that for every 10 people – businesses or investors – who
are interested in purchasing the business, about three of those 10 are
already operating in the same market.
Quite often those three will be very conservative in terms of the price they
offer for the business – invariably they will offer below what we might
determine is fair market value.
Why is that?
Because they are weighing up the argument of ‘buy versus build’.
They know they want to get bigger, pull in more customers, deliver to different
geographic areas, add on additional products and so on, but what they’re
thinking is ‘why don’t I just grow organically and develop that offering
myself?’
How much will the market pay?
If they do decide buying is the better option – perhaps because it will get them
where they want to be more quickly – then how much will they pay?
Given they’re already operating in the same industry, chances are they won’t
consider the alternative – starting the business from scratch – as risky.
So if the risk is not high, why pay more than necessary to avoid it?
Here’s an example:
I run a food distribution business based in regional NSW and I want to
expand into regional Queensland.
What are the advantages of buying a food distribution business located
in Warwick, in regional Queensland?

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Am I better to buy this business or just grow incrementally by sending a
couple of trucks and a few key sales staff to regional Queensland,
renting a short-term load dock premises and starting from scratch?
The strategic benefit of buying is that I’m not operating in that
geographic location now and I don’t have a customer base there, so
there is complementarity and critical mass of customer orders.
I have expertise in food distribution and the systems and processes. I
probably have supply contracts already in place and can leverage
those.
What to do?
The answer comes down to a judgement
on value:
• Do you start from scratch with
no customers and go through a
hockey stick investment cycle to
build a customer base in order to
have enough activity to supply a
different geography?
or
• Do you buy the business and its
customer base of 400 customers
already in place in the new
geography?
There is a point at which you make a
decision depending on the value
assessment and equation, and you may benefit from seeking independent
valuation advice to assist in pressure testing your thinking.

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Quantifying strategic value
Let’s keep using the food distribution business in Queensland as an
example:
The business’ fair market value (FMV) is 3.5 times its business
maintainable earnings (BME).
BME = $575,000
FMV = approximately $2 million
In addition to the FMV, as a potential buyer you would look at things
like geographic expansion opportunities, people and systems, and
economies of scale.
For instance, all your supply, sales management and product support
services are located in one place right now. The same services
currently cost the Queensland business $350,000 per annum. By
consolidating those services, when and if you take over the business,
you are likely to save $350,000 immediately.
However, given you may be absentee to the business in Queensland,
you may decide to add an additional $100,000 for on-ground sales and
business management there.
So we have the positive synergies ($350,000) and negative
synergies ($100,000) of buying this business.
Net synergies in Year 1 = $250,000.
That synergy is a quantified calculation of strategic value for you,
in buying that business.
Importantly, from a vendor’s perspective in looking to sell the
business, it is not the strategic value for the entire market – just for
this particular potential purchaser.
If another potential purchaser was a food distribution business located
just down the road in Toowoomba, those synergies would be different.

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Facts and figures versus emotions
By using the synergy example I’ve tried to put some level of quantitative
analysis to strategic value, but we must always remember the qualitative
angle: there is often an emotional reaction by one business owner to
another’s value proposition because of their individual circumstances.
We’ve said it before: business valuation is not an exact science.
Who pays for
strategic value?
The next question is: ‘Does
the market actually pay for
strategic value? Will they
pay for those synergies?’
This is where there is a
tussle.
In the business advisory world
the traditional advice to clients
has always been: ‘Don’t pay for opportunity – you bought the business,
you're taking the risk, you have to create those savings. Don’t spend extra
money – instead keep that extra value with you.’
However, that doesn't take account of the market dynamics, if there are
three or four people interested in buying this business, and if there is an
emotional response. In those cases, part of that synergy will be shared in
the price the purchaser pays the vendor.
In our experience that can be anything from 5 to 30% – it varies widely and
each set of circumstances is very different.

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Does the market separate ‘fair market value’ and ‘strategic value’?
Business valuers may talk about ‘fair market value’ versus ‘strategic value’ but,
by my own admission, these concepts are a little more high level than
common market behaviour.
Does the market always separate fair market value and strategic value when
assessing a business opportunity? Not always.
Instead buyers may say: ‘That valuation looks about right but I’m prepared to
pay a little bit more because I really want it – that would be just perfect and fill
the one gap in the shelf of my business portfolio. I reckon I could run it easily
because I have just the right person to slip into that role.’
So while the term ‘strategic value’ doesn't always appear in discussions
between a buyer and seller, assessing strategic value is exactly what
potential purchasers are doing. They’re thinking:
‘If I purchase this business, what are the things of extra value that I can
drive over and above fair market value?
‘FMV may represent a return on investment of 25%, but if I get all my
synergies right as a purchaser coming in, I might be able to move the
ROI per annum up to 35%.
‘If I can see myself achieving that with relatively low risk, how much of
that value am I prepared to share with the vendor to get ahead of one
of my other competitors?’
The degree to which there is shared strategic value in any business sale
will depend on the competitive tension within the industry, i.e. the
number of players looking at that opportunity.

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Chapter 4: How to create strategic
value in your business
Comments by James Price
JPAbusiness Pty Ltd
As we discussed in Chapter 1, there are things a business owner can do
to impact the strategic value of their business, both positive and negative.
For example, you can impact strategic value in a negative way by doing things
to harm your brand and reputation with customers, such as:
• Poor financial management – which is reflected in not paying your
bills on time;
• Poor customer management – which is reflected in poor service
times and poor quality delivery.
In due diligence processes, where purchasers are looking to quantify and
confirm the reasons for paying additional strategic value for a business, they
will confirm whether or not those sorts of issues are impacting the business’
reputation.

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The JPAbusiness Strategic Value Checklist
To help you drive positive strategic value in your business, we have
created a checklist of business characteristics for you to consider.
You can use the checklist provided on the
following pages, or download a pdf
version from our website by clicking on the
image at left.
It’s important that you consider these
characteristics as you are running and
operating your business, rather than
leaving it until five minutes to midnight
before you sell your business.
This is because while strategic value
drivers are not always quantifiable, as
we’ve discussed in this eBook, they’re not
fairy dust either. They can’t be created with a magic wand overnight!
Strategic value drivers are real actions you can take to drive year-by-year
earnings in your business, and also potentially assist you to capture
extra value on exit of your business.
Of course, when it comes time to exit there are no promises with these
factors as they are impacted by how well you can get ‘the stars to line up’
between your offering and a potential purchaser’s business aims, and they’re
also impacted by external market dynamics.
Again, this is also where you might benefit from seeking professional
advice from a business sale specialist or advisor when preparing your
business for sale.
©"2015"JPAbusiness"Pty"Ltd" This"work"is"licensed"under"the"Creative"Commons"Attribution"4.0"International"License.""
ABN"62"150"534"099" To"view"a"copy"of"this"licence,"visit"http://creativecommons.org/licenses/by/4.0/."
JPAbusiness"Strategic"Value"Checklist"
trategic value is the value a purchaser is willing to pay for a business, over and above what an
impartial business valuer might determine is ‘fair market value’.
How much a purchaser will pay for strategic value is largely determined by their individual
circumstances, but it can also be influenced by a vendor’s management decisions long before sale
time.
Below is a checklist of business and industry characteristics which can influence strategic
value. Use the checklist to support your decision making and help drive positive strategic value in
your business.
S
Business'and'industry'
characteristics'
Factors'to'consider
1. Clients – customer base
diversity
! Avoid concentration risk
! Consider contractual arrangements to support orders
2. Products – supply contracts
and certainty
! Consider opportunities to offer products that are exclusive
! Negotiate distribution agreements with favourable supply
terms, certainty and consistency
3. Brand – well established,
recognised and reputed
! How well-known are you in your target markets (without
investing significantly in marketing)?
! What’s the ‘pull-power’ of your brand?
4. Value – clear, unique and
valuable point of difference in
your offering to the market
! What is it you do better than anyone else?
! How are you protected from others replicating you?
5. People – structured and
dedicated team of people running
key functions
! Retention and performance of people (as if they own a
slice of your business) is a key determinant of success
6. Process – well-established
systems and processes
! Ensure your systems provide consistent quality and
replicated outcomes through your business and in the
service and offerings it provides to the market

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©"2015"JPAbusiness"Pty"Ltd" This"work"is"licensed"under"the"Creative"Commons"Attribution"4.0"International"License.""
ABN"62"150"534"099" To"view"a"copy"of"this"licence,"visit"http://creativecommons.org/licenses/by/4.0/."
JPAbusiness"Strategic"Value"Checklist"
trategic value is the value a purchaser is willing to pay for a business, over and above what an
impartial business valuer might determine is ‘fair market value’.
How much a purchaser will pay for strategic value is largely determined by their individual
circumstances, but it can also be influenced by a vendor’s management decisions long before sale
time.
Below is a checklist of business and industry characteristics which can influence strategic
value. Use the checklist to support your decision making and help drive positive strategic value in
your business.
S
Business'and'industry'
characteristics'
Factors'to'consider
1. Clients – customer base
diversity
! Avoid concentration risk
! Consider contractual arrangements to support orders
2. Products – supply contracts
and certainty
! Consider opportunities to offer products that are exclusive
! Negotiate distribution agreements with favourable supply
terms, certainty and consistency
3. Brand – well established,
recognised and reputed
! How well-known are you in your target markets (without
investing significantly in marketing)?
! What’s the ‘pull-power’ of your brand?
4. Value – clear, unique and
valuable point of difference in
your offering to the market
! What is it you do better than anyone else?
! How are you protected from others replicating you?
5. People – structured and
dedicated team of people running
key functions
! Retention and performance of people (as if they own a
slice of your business) is a key determinant of success
6. Process – well-established
systems and processes
! Ensure your systems provide consistent quality and
replicated outcomes through your business and in the
service and offerings it provides to the market

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©"2015"JPAbusiness"Pty"Ltd" This"work"is"licensed"under"the"Creative"Commons"Attribution"4.0"International"License.""
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If you would like to learn more about the business advisory and broking services
offered by JPAbusiness, please contact the team by visiting
www.jpabusiness.com.au/contact-jpabusiness
Please"feel"free"to"post"this"template"on"your"blog,"or"email,"tweet"and"share"it"with"your"network.""
Business'and'industry'
characteristics
Factors'to'consider
7. Ownership - trademarks,
patents, licences, exclusivity,
technology and know-how
advantages
! Do you own or control any of these?
8. Market and industry
consolidation, changes and/or
competitive pressures
! What are the external market trends that may either
positively or negatively impact your competitive position?
9. Expectations – changes in
customer expectations
! Remember the customer is always right!
! Know the customer and their changing needs and reflect
their expectations in how your business model services
those needs
10. Advancements – ‘category
killer’ changes
! Category killers include sudden impacts that disrupt your
market, such as internet sales, technology changes and
regulatory changes
! Be flexible, be prepared and know and trust your core
offering