The sale of your "built from scratch" business is something many business owners consider from time to time. Whether you are very serious about the sale of your business or still unsure, it can be useful to review key aspects that attract buyers when considering a business acquisition.
Businesses, even small ones, are inherently diverse animals. This translates to a wide spectrum of key items to consider when thinking of selling. Items like your discretionary earnings, tax considerations, capital investments, current contracts, inventory management and growth modeling are just a few of the many elements to examine. The following discussion will review five essential considerations to deduce how attractive your business may be to potential buyers.
Profitability. Surprisingly, high profitability is not the most critical piece of information to a buyer. Business acquisitions are made for many reasons. Strategic acquisitions may prioritize capturing assets with potential for profitability. This might look like gaining a foothold in a symbiotic industry to add business synergy, or capturing intellectual property rights or patents of a less than profitable business. That being said, buyers are often attracted to businesses demonstrating growth, profitability, reliable cash flows and recurring or repeat revenue. Companies showing consistent, profitable performance can compel buyers to make an inquiry or could even cause multiple buyer competition.
It is critical to review your company's performance records to understand the aspects of your business's profitability that may attract buyers:
- Is the profitability of your business clearly evident, questionable, or is it a mystery known only to you?
- How does your net profitability compare with industry peers?
- Have you established a defined and supportable growth pattern and rate for the company?
- What benchmarks has your company achieved and did these meet or exceed your targets?
- How effective has your strategic planning been?
- Are you in possession of any unique intellectual property that may be of interest to a strategic buyer?
Records. Serious and qualified buyers want to see clean, clear and transparent records, including Financial Statements, Balance Sheets, P&L, Tax Returns, Sales Volumes, Purchase Documents, Suppliers, Inventories, Customer Lists and the procedures and systems to manage your business. The better documented and well organized your business records are the better. Buyers are seeking information - they want to know the ins and outs of your business. The more they know the more they can better understand your business and the more comfortable they will feel with a purchase.
If your record keeping has been less than desirable, it would behoove you to hire an accounting expert to clarify and audit at least your financial documentation. Buyers are not going to be willing to give you credit for revenue, earnings or profitability that is unreported or unsubstantiated. In addition buyers unsure of your provided financial data, will likely take the opportunity to question other aspects of your business.
Value Proposition. While there is a buyer for every business, some businesses will inevitably be more popular than others. Buyers want to know the strength of your industry or your niche market. They will want to know if there will be realistic opportunities for growth (i.e. added value). To understand the true value of your business ask yourself:
- Is your company unique or distinct within the market?
- Are you in a growing, static, or declining industry?
- How do you differentiate your company from the competition?
- Do opportunities for growth or additional market leverage exist?
- Does your company have any advantages like intellectual property or patents?
Can Your Business Stand Alone? Your business is your "baby." You have built it and nurtured it and understandably you hold a lot of tribal knowledge concerning it. So the real question becomes, "Can your business run successfully without you?" If you have built your business in just such a way that you are indispensable to its success then you have some work ahead of you. To increase the attraction of buyers to your business you will need to pass on your tribal knowledge and expertise. Now is the time more than ever to bestow your knowledge onto quality management. It would also be appropriate to implement well-documented processes and procedures if you have not already done so. These will all support the effective operation of your business without your direct oversight.
While we are on the subject, ensuring you have strong management in place will confirm to buyers that the business will essentially run the same upon your exit. Taking time to provide additional training of management and key employees will help reduce ties between you and your business. And will allow you to focus more on your exit strategy and future goals. If your business can be effective in your absence, then the buyer will know they too can run it effectively.
Streamline and Standardize. A great tie-in to extricating yourself from your company is streamlining and standardizing processes. Boiling processes down to their most simple and effective forms makes them more predictable, reliable and easily supported. But most importantly, buyers are attracted to organized and well-run businesses.
It is for these same reasons that buyers are often attracted to franchise businesses - buyers can easily see they are well-oiled machines with good processes in place. Reviewing and improving items like employee manuals, job descriptions and operational processes show the salability of your business. This type of documentation can elucidate small and large business alike. Because it shows to buyers that the business has the key elements to continue to be successful and scale as needed.
What Have We Learned? Ultimately, it will be helpful to take an objective, dispassionate view of your business. Take some time to investigate businesses for sale online and identify what makes them attractive to buyers. Or think of your business as a house for sale. Just as a house is cleaned, prepared and staged to make it attractive to a potential homeowner, so should your business be cleaned, prepared and staged for potential buyers. The team at Transworld can help you to prepare and present your business for sale in an accurate and alluring manner to maximize its value and appeal to a quality buyer.
To learn more about Transworld's service offerings visit our website or speak to one of our team members by scheduling a consultation today!
Roger Smolik is a Business Broker at Transworld, with substantial experience in sales, consulting, capital facilitation, operations, and executive management. Previously he worked in financial securities with several international firms in California and later owned and operated a boutique investment brokerage. Transworld provides Roger with the opportunity to continue to be engaged with the essential elements of the business that have always inspired and fascinated him - the ongoing cycle of business incubation, growth, maturation and economic payoff through an eventual sale, merger or expansion.