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4 Key Elements Buyers Are Looking for in a Business They Might Purchase

If you are considering the sale of your business, you are probably wondering what you need to do to make it the most salable. With the number of business going on the market increasing as baby boomers seek retirement, the competition for buyers and multiples will continue to heat up. There is an abundance of liquid capital on the sidelines, but it will be invested only in the best business.  There are many factors that will pique a buyer’s interest and drive the best possible price. Owners tend to focus on gross revenues. While that is important, there are four other critical areas which should be considered:

The condition of your financial records.

If you have been increasing expense in an effort to minimize your tax consequences, it can dramatically alter the price you will receive for your business. Every dollar you fail to show as profit can cost you from three to eight times in sale price. This of course depends on your industry, size of your business, and other business attributes, but the point is this can make a substantial difference. The integrity of the financials also has to be addressed well in advance of a potential sale. Also, look for write-offs that have not been realized, inventory that is not correctly accounted for, and accounting procedures that do not conform to GAAP (Generally Accepted Accounting Principles). Lenders and buyers will require at least three years of historical financials that consistently show good profitability and accurate reporting.

A solid management team.

If your business cannot run without you, it will severely limit your buyer pool. Buyers are seeking well-run investments that are not dependent on the owner for their viability. Dependence on the owner is viewed as a risk, not as extra security. In addition, this creates a very dangerous position for an owner. If the business ceases to run or runs poorly in the owner’s absence, the asset, the income, and the future are all in great peril. We stress the importance of a solid contingency plan, which ensures the business can and will continue without the presence of the owner whether due to travel, retirement, illness, or death. Creating a solid management team reduces an owner’s risk in the business and is appealing to potential buyers.

Quality products and service.

How do you rank within your industry? Are you considered a leader in your field? Buyers are seeking a clean, solid reputation for customer satisfaction since customer loyalty usually results in repeat sales and the likelihood of increasing gross revenues. A related critical benchmark buyers are looking for is quality products with few returns or warranty issues. This also helps maintain a solid gross profit margin. Buyers are keenly aware of the goodwill this creates, which can translate into continual growth.

Systems and procedures in place that are written and up to date.

Unfortunately, businesses sometimes don’t make the time to adequately document their processes and procedures, or they are woefully outdated.  Couple this with potentially inadequate systems, and the ability to transfer the business to a new owner may be severely hampered. This can cause a buyer to have a negative view of the business. This is also an area of great risk for the continued operation of the business, which should be addressed in the contingency planning phase.

To improve your chances of a successful sale outcome at the best multiple possible, be prepared and think ahead. Buyers are seeking quality businesses that are scalable, transferable, and have repeatable profits.  The price they are willing to pay is largely a reflection of their perception of the risk level in your business. The more risk, the less the multiple; the less risk, the higher the multiple. All businesses are inherently risky, but minimizing the risk in your business while you own it and positioning it for a future sale will pay off handsomely.

Your largest illiquid asset and entire financial future are dependent on you being adequately prepared. Don’t leave it to chance. Minimizing the risk potential in your business takes time, effort, and planning as do most things that are worth accomplishing. We recommend you begin the planning process at least three to five years prior to your desired transition date. We also believe a solid contingency, succession, and transition plan should be part of any comprehensive business plan for all businesses, for any owner, at any age.