You’ve decided that the time has come to exit your company. You’ve worked hard, grown a great business, provided a stable living for your employees. But enough is enough – it’s time to go. You know what you’ve built and know what you want. You’re ready to sell. But just like in your business, it takes two parties to make a sale – a willing seller and a willing buyer.
Experienced Business Brokers and M&A Advisors agree - in order to position your company to achieve the best results when you sell, you need to think like a buyer.
Why do buyers buy businesses? To generate revenues? To own plant and equipment? To have employees? The answer is “no” to all of the above.
Buyers buy businesses in order to make money. Everything else is just a means to that end. Whether the buyer is an equity fund, a private individual or another company in your industry or a related industry, by purchasing your company the buyer is paying for the right to step into your shoes and make as much (and hopefully, more) money as you do.
While some buyers are looking for very specific types of companies to acquire, most are interested in broad categories like service, construction trades, tech or distribution, and then limit their search by geographic and size considerations.
Because buyers buy businesses to make money, it is not surprising to learn that businesses are valued largely by how much money they make. Other factors that influence the valuation include the type of business, recent trends in the individual business and in its industry, assets and or liabilities included in or excluded from the transaction, geographic desirability and the existence of risk factors that might cause the goodwill of the company to evaporate after the sale.
Buyers avoid businesses where there is a substantial risk that the business’s goodwill - its ability to generate profits – might disappear. This could happen for one or more of the following reasons: unstable customer concentration (one or two big customers whose loss would cripple the business); lack of management structure (where the knowledge and relationships necessary to conduct the business reside exclusively with the owner); or external risk factors, such as increased competition, impending loss of a valuable location, technological obsolescence, etc.
Just like in your business, business sales - mergers and acquisitions - occur in a competitive market. Why should a buyer make a bid on your business as opposed to the many other businesses available for sale?
Here’s what you can do to make sure your business is attractive to buyers:
1. Keep your hand on the wheel. Once you commit to selling your business, it’s crucial that you continue to manage your business as if the sale were not on the horizon. It’s easy to take your hands off the wheel, your foot off the gas, and put your business on autopilot until closing. Big mistake. Nothing spooks a buyer more than getting a current sales report with lots of red numbers and downward arrows. You need to concentrate on maintaining and even growing your business, even as your Business Broker or M&A Advisor is guiding your sale forward to closing.
2. Avoid risky customer concentration. Some business owners make the mistake of structuring their company around a single client or customer who makes up 30-50% or more of overall revenue. Companies in this position face big obstacles when they want to sell. Unstable customer concentration presents a major risk to potential buyers. The buyers will want to deal with the risk of losing such a critical customer by either discounting the price or structuring the deal so that a portion of the purchase price is connected to future revenues from that customer. To protect and enhance the value of your business, it’s best to diversify your customer base so no one client accounts for more than 30% (and better yet, 20%) of total revenue.
3. Structure second-level management. Some business owners have trouble delegating – they keep their hands tight on the reins, make all the important decisions themselves and are the main point of contact with key customers. That’s great as long as it works, but it’s not so great when it’s time to sell. Buyers will avoid or discount companies where all decision making and key customer relationships reside with the owner. If you don’t already have one, it’s important to create a strong second level of management before you put your company on the market. Start delegating decision making to your next-in-command. Transition key customer relationships to trusted managers. It may be painful for some owners to give up some control, but it will yield strong dividends at the sales table.
To discuss your situation and to see if your business is positioned well for sale, click here or click on the button below and we’ll map out the steps you need to achieve the highest possible market price for your business. There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.