Owners often try to sell to the wrong people. One of the biggest mistakes is thinking that the best buyer for the business is a competitor, customer, or supplier. If the deal does not happen, and most do not, then a great deal of confidential information about your company has been disclosed. Suddenly, everybody knows more about the company’s profits and operations than they should. Guard your information carefully and keep your intentions confidential unless you are ready to sell at a rock-bottom price.
In our recent “Business Transition Lessons Learned: I Want to Buy Your Business!” we told the story of a well-established retail company whose owners thought they hit the jackpot when one of their suppliers offered to buy their business. However, this “perfect buyer” did not have the financial resources or any genuine interest in acquiring the seller at all. Instead, he stole their customer lists, told their customers, employees, and suppliers that they were selling their company, and since he was in the industry, managed to maneuver the exclusive, lucrative product lines away from the owners to his new company. In essence, he stole their company right out from under them, and they willingly helped by feeding him the information he needed. This is a worst case scenario, but it highlights the importance of having all of your ducks in a row before you engage potential buyers.
Here are some questions to consider to help ensure that potential buyers are qualified:
- Are they financially able to purchase the business?
- Do they have the business knowledge, management experience, and skills to grow the company?
- Why are they interested in buying your company?
Additionally, sellers need to understand what potential buyers are looking for when they evaluate your company.
You need to understand a potential investor’s motive. Investors are looking to the future for return on investment and growth potential. The investor seldom buys what the seller thinks he is selling. Owners would be wise to emphasize the business’s growth potential rather than dwell on past performance.
What buyers are typically looking for in a business they might purchase:
- Business can operate without the owner
- Clean financial records
- A solid management team
- Increasing revenues and profits
- Quality products and service
- Documented and up to date systems and procedures
Documenting improvements that could be made by an investor with new capital helps you to position the company better and can increase value significantly.
Broaden the geographic search area; the best investor isn’t always local. Most sellers naturally assume that the market for their business is within their surrounding geographical area. However, thousands of very quiet private investment groups and offshore investors are interested in acquiring profitable, US based, privately held companies. The world is now your marketplace, and the best investor may be anywhere across the country or around the world.
Finding the right buyer for your business means you need to determine your financial and non-financial goals, determine how much money you need to net, understand what buyers are looking for, maximize the value of your company and find and qualify potential buyer. It is a lot for owners to manage and handle but failing to do these things could jeopardize the future of your business, your potential retirement, your family, and your legacy.
While small, privately held business owners often try to go it alone, we recommend working with an ownership transition planner and a professional intermediary who can help you with the necessary preparation and then stay with you throughout the deal process. This will ensure that all of your goals are achieved and allow you to be able to focus on running your business which is most critical to having a successful transition.