When you first begin to think about selling your business take some time to consider what your potential buyers will be looking for and what will make your company stand out from similar businesses for sale. After all, when you do sell you will want to achieve the best possible price so taking time to prepare and increase exit value will bring substantial rewards in terms of exit value.
Several owners who have sold businesses have said to me that, if they were to start again, they would place a much higher priority on driving up exit value and understanding what is crucial to achieving this.
One thing a buyer, either financial or strategic, looks for is growth. A company that can demonstrate consistent growth and has a clear, robust plan for further growth will be more attractive and more likely to command a premium price.
Some smaller companies, particularly owner-managed businesses, can show a consistent growth record but find it difficult to confidently forecast growth. This is often because there is no experienced Sales Director with the skills and experience to do so. Usually, these companies have grown through reputation and referrals, so they have very high repeat business rates but correspondingly low rates for new client acquisitions. Consequently, their growth is often slower than companies with a good sales and marketing team. Nevertheless, companies with high client retention and repeat business rates offer scalability, having the ability to leverage the client base through new products and services.
Another key criterion is profitability – not to be confused with growth. From a buyer’s perspective, higher profitability reduces the risk of post-transaction operating failure, as well as providing a faster payback period. A study by Intralinks and Cass Business school found that the profitability of target companies was, on average, 1.2% higher than that of non-targets in the private market. Therefore, a combination of growth and profitability makes for a very attractive acquisition target.
These are just two examples of what acquirers look for and there are many others. Often these are the less tangible assets; those that don’t appear on the balance sheet, but they are barriers to entry to your marketplace and protect your business from competitors. These include patents and other protected intellectual property, exclusive long-term contracts, recurring revenue streams and a well-established brand.
Whilst considering what would make your business more attractive, it’s also important to look at what would be unattractive. One word summarises this – RISK. A buyer will never offer a premium price for a business where an acquisition contains unacceptably high levels of risk. This doesn’t only affect the headline price, as often the deal structures are equally important. Ideally, you will want to convert the value you’ve created in your business into cash and a poor deal structure will seriously reduce the amount of cash you receive up front.
One of the most common risk is owner-reliance, where the value in the business cannot be transferred from the current owners. Whilst some such companies may have high turnovers and be very profitable, generally speaking, they don’t have a strong management team so any offers for this type of business are likely to be highly structured and be dependent on the owners remaining in the business post sale.
Another is client concentration, where a large part of current and future revenues derive from just a few clients, typically the top 5. This links back to the need for good sales and marketing enabling you to create a more diverse client base.
To summarise: Consider what your company offers a prospective buyer by taking an objective view of the strengths and weaknesses of your business, and thinking about how different buyers might regard those attributes in their distinct paths to creating value.
If you would like to know more about preparing a business for sale (and it’s worth noting that this can take 1 – 3 years) please contact us or visit our website where you can also get a free 29 page business valuation report.