What Makes A Business Attractive To A Buyer?
Buyers purchase businesses for a return on their investment. Seller's base the business value on past performance, while buyers place the value on the future potential profits and risk level to achieve them. When the seller puts themselves in the buyer's shoes, it will be easier for them to understand what buyers are looking for and why, and be better prepared for a successful transaction. Read on to find out what buyers are looking for and what steps you can take as a business owner now, to prepare yourself and your business for a sale in the future.
Different Kinds of Buyers
Attractiveness depends on the type of buyer interested in the business. There are three main types of buyers who have different goals and criteria. Each business is judged on how it meets a buyer's needs. Knowing ahead of time what buyers are looking for and their motivation for buying can help business owners prepare.
- Strategic Buyers are buyers that want to diversify, expand or eliminate a competitor. Strategic buyers therefore may be friendly competitors, clients or vendors of your business. They could be a business in an adjacent sector that wants to diversify or bring a product/service in-house, or a similar business expanding their footprint, or a direct competitor from another market. Strategic buyers may be willing to pay based on a higher multiple of cash flow depending on the value of the acquisition to them. Strategic buyers typically will purchase businesses with revenue over $1,000,000 and earnings over $300,000.
- Investors are private equity firms or private individuals seeking a return on their investment within three to five years by growing and re-selling the business. Investors will look for businesses not reliant on the owner that have clear opportunities for growth by adding cash or resources. They may pay a higher multiple of cash flow or EBITDA (earnings before interest, taxes, depreciation and amortization) for the business depending on the potential for return on their investment (ROI). Investors, however, require a LOT of detailed reporting and time from the owner before a decision is made. It can take up to a year of an owners time and effort just to learn that the investor decided to withdraw. The upside is that investors that do move forward will typically pay more for what they are looking for, anywhere from one to millions for the right opportunity.
- Owner/Operators are individuals that want to buy themselves a job. Some buyers may be purchasing a business more as a hobby while others want to earn a living for their family. Typically owner/operators will purchase businesses from between one hundred thousand to a million dollars. They are also looking for opportunities where the cash flow of the business will pay them a salary and also pay down the debt used to acquire the business. Owner/Operators will typically be purchasing the business through a combination of savings from their 401k (401KRob) or SBA or conventional bank loan and some amount of seller financing. Banks like to see the seller have skin in the game and be motivated to help the buyer succeed.
What Buyers Look For:
Buyers are looking for a business they can grow and continue to generate profits from, at a risk level they are comfortable with. So what things help them feel more comfortable with that risk?
- Steady Increase In Profits for Three Straight Years
- Steady Increase in Revenue for Three Straight Years
- Established Customer Base
- Residual Income Stream
- Established and Good Reputation
- Documented Process and Procedures
- Positive Cash Flow
- Minimal Reliance On Owner
- Growth Market Segment
- Employee longevity and skills
Businesses that are not reliant on the owner, have positive cash flow and sales trends, that have trained staff in place that will stay on after the merger or acquisition, that have documented processes and procedures in place, a good reputation, steady client base and residual income are businesses that tend to sell. How does your business "score" in these areas? More importantly, are YOU ready to sell your business both personally and financially?
The first step in the process is to talk to an advisor. We may suggest a Benchmark Broker Opinion of Value and Value Gap Analysis that gives you a road map of steps to take prepare your business for a sale. Contact us today for a complimentary consultation. It is never too early to start planning your transition.