Market size and economics variations

May 18, 2023

by a searcher from Fort Hays State University in Wichita, KS, USA

In looking for possible acquisitions in smaller markets (sub 500k population) or markets that have lower economic growth, what kinds of variations do you make in valuing these types of business? Is value strictly determined off cash flow or is there some discount when looking at these conditions compared to larger/faster growing markets?

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I think it largely depends on the type of business. Some businesses, like manufacturing or ecommerce, can be very successful in smaller communities as the market they serve is much larger than the community they are in. However, if you are looking at service businesses, then you really need to look at the available market share to determine how much you can grow. If you want to grow to other markets there will be greater costs typically due to distance and having to establish secondary offices because you cannot service the same area from one office in a smaller demographic. I hope this helps.

Reply by a searcher
from Oklahoma State University in Wichita, KS, USA

^redacted‌ When looking at markets like this I consider: 1. What does it take to protect the core market. 2. What are the opportunities for growth.

Smaller markets also likely have fewer able and willing buyers so that may be a consideration for all parties.

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