You’ve built a great business with love and care. The business has grown larger than you’d ever imagined, and it generates a nice profit that has allowed you and your family to live a comfortable life. Now you’ve decided it’s time to sell. You assume there’s a buyer out there who will pay you a fair price and then nurture the company with the same attention you have. What’s more, selling the business is a major part of your retirement plan.
Needless to say, buyers look at businesses differently than sellers. So to achieve the outcome you want, it’s important to think like buyers and understand how they evaluate a business. By entering the mind of prospective buyers, you can see what you can do to increase your company’s appeal.
What Buyers Look For
There are many types of buyers: strategic and financial, individuals, companies, and private equity funds. Despite differences, all buyers consider how much they’ll invest to acquire a business, the amount of risk they’ll bear and the potential return on their investment. To evaluate an opportunity, buyers focus on three major areas:
1. Cost and terms. What will it take to acquire the business? (How much cash and how much debt?) What are the deal’s terms and conditions?
Because we’re constrained by space, we’ll focus on one standout issue: the amount of cash required to make the deal. By decreasing the cash requirement and increasing the acceptable debt portion, a seller can make its company more attractive – and perhaps even increase its selling price.
The biggest factor directly affecting a deal’s attractiveness is the asset base. Simply put, the more the buyer can borrow against to do the deal (or for post-transaction capital), the less cash you need upfront. As collateral, banks usually accept land, buildings, equipment, inventory and accounts receivable.
Many entrepreneurs have purchased the land their business resides on and leased it to the company. An often unanticipated side effect is that this structure reduces the company’s asset base, thereby decreasing the amount of debt leverage the seller can obtain.
Another way sellers can reduce the buyer’s initial cash requirement is by accepting part of the purchase price over time. Commonly known as “seller paper,” this can do a great deal to lubricate a sale.
2. Continuity. Will the business continue to operate similarly after the sale? In fact, much of the risk of buying a company relates to continuity. Let’s look at a few examples of potential continuity problems:
- The current owner has personal relationships with customers, distributors or vendors that the new owners may have to struggle to maintain.
- The current owner has special expertise that is undocumented and difficult to learn.
- Key personnel aren’t committed to staying.
- A major threat of offshore competition looms.
Sellers armed with solid responses to these types of continuity concerns will more frequently get their desired price. Even if you don’t want to sell your business for a few years, take steps now to ensure it can run smoothly without your personal involvement. That independence can be worth millions to you when you sell.
3. Growth. Don’t hesitate to point out unexploited opportunities. For instance, you may have focused your sales efforts in one geographic region, but there may be many opportunities to take the product national or international. A buyer who believes he or she can substantially increase revenues will pay more for the business than one who believes the current owners have maximized opportunities.
What Sellers Should Do
It may seem counterintuitive, but the things you may be most proud of can work against getting the best price for your company. Not many entrepreneurs like to boast, “My company would run just fine without me,’ or ‘There’s lots of sales opportunities I failed to exploit.” Yet these may be the very factors buyers seek, along with lower cash requirements. Please call us for help in understanding how to best present your company for sale.