It’s true – larger businesses are typically more sought after in the world of M&A. They often attract a wave of investors for a variety of reasons – their scalability, their return on investment, their access to economies of scale... the list goes on.
But for all companies, whether small or large, risk (and the company’s ability to mitigate it) is fundamental to its valuation.
A large business typically has the basics well established – a diverse product range, an established brand and customer base, a well-trained workforce and a presence in numerous market places – all of which are factors that reduce risk for investors.
A small business, however, may not necessarily have each of these factors in place, and are therefore considered riskier. As a result, this reduces the valuation of a small business. It doesn’t, however, reduce their opportunity to deliver substantial financial rewards for their owners when eventually sold.
With large businesses, investors typically exist in a ‘sellers’ market’, and therefore have less bargaining power, which makes intuitive sense as they usually attract lots of high quality investors.
On the opposite end of the scale, smaller business don’t typically attract as many investors, creating a ‘buyers’ market’, meaning interested investors have greater negotiation power.
Large companies are better equipped to withstand changes in the economy, and as a result are able to deliver more stable and dependable financial returns – reducing risk.
However, a small business is arguably more adaptable to changing climates. Typically accumulating less revenue than a large business, they are better equipped to respond to changes in the economy, making them equally worthwhile investments.
By no means objective, the valuation of a business depends on many other internal and external factors. If you would like to speak to our award-winning team regarding a business valuation, or have any other Corporate Finance related queries, please get in touch.