What Do Buyers Want? A Healthy Business.
You have to be living under a rock if you haven’t heard all the discussion about exit planning, or succession planning, and the 10 million baby boomers about to sell their businesses. Exit planners are in a frenzy over the opportunities.
So much of the discussion is regarding the owners of these businesses and the fact that they aren’t doing enough “real” planning, and if they have, they’re not documenting their plans. But, not much is being said about what buyers are looking for.
If you aren’t close to selling you may want to tune me out, but don’t. No matter where you are in the life cycle of your company, from startup to exit, it’s never too soon to focus on business health. Look at your business the way a buyer would and prepare it for sale accordingly. Buyers want a healthy business.
Here are some of the things that make a business healthy:
Stable, motivated management team The most important thing I convey to clients is the more valuable you are to your company, the less valuable it is without you.” Buyers will not pay a premium for anything that leaves with you. If your business if overly dependent on you, it’s going to be hard to sell unless you stay around and teach a potential buyer all you’ve learned in the years you’ve owned your business. If it’s all in your head a buyer will have a hard time.
Buyers will pay a premium for a stable, motivated management team, which can oversee the day to day operations of the company so that a buyer can sustain the same profitability that you did, without you.
Key employees Buyers want a compensation system in place so that the key employees will remain motivated to stay after they buy the company. It is essential to have non-compete agreements in place with key-employees so that they can’t take the customers, trade secrets, etc.
A true key employee has the following traits:
A direct and significant impact on the value of the business
Skills and experience that are very difficult to replace
An important role in the strategic future of the company
The loss of a key employee will have a direct financial loss to the company and will make a buyer very hesitant to purchase any company.Once the key employees are identified then we can design incentive plans that will motivate them to stay with the company long into the future, making any business far more valuable.
A high-performing workforce Buyers want employees’ responsibilities to be connected to revenue generation, not a seniority model with lower-level employees performing simpler tasks. Eliminate redundant jobs, combining activities and increase profit. Ask: Why is this activity good for revenue? Do we want to do more of it or, perhaps, eliminate it?
Connect employee activity to company success. How does each employee’s activity contribute to the company’s success?Give up activities, as the owner, which can be transferred to other employees, making the business more valuable by keeping skills with the company when you leave.
Of all the ways a company can improve its efficiency, productivity and quality of employees to increase the value of a company.
Well-documented systems and automated processes A buyer wants well documented systems and automated processes in place so they can step in and immediately perform at a high level.
A buyer won’t pay for anything that leaves with you; they don’t want to recreate the wheel so to speak. The buyer’s number one question is, “Can I rely on the systems and processes that are in place so that my success is repeatable and sustainable?” If they can’t, they may not be able to continue to make the cash flow necessary to pay you the monies owed you.
A business system that is repeatable and sustainable is one understood by employees and used to achieve the desired purpose. Some of those systems implemented include; human resources, marketing, organizational, administrative, financial, accounting and sales systems. You must have effective systems to add value to your company.
Due diligence Would you purchase a company without first learning everything you can about it? I think not. Neither will a buyer. This learning process is called due diligence.
During the due diligence process, a buyer and buyer’s advisers will examine all aspects of your business, including your contracts, procedures, systems, plans, agreements, leases, manuals and financial records.
Put yourself in the shoes of the buyer. Begin the due diligence process as quickly as possible so you can remove all barriers to sale prior to the buyer entering your premises. That is why it is extremely important that you and your advisory team clean up all contracts, agreements, stock ledger books, corporate records, leases, or lawsuits before you enter the marketplace.
Growth plan Buyers are looking for growing businesses in growing segments of the market. Each small business owner has the same goal of turning their small business into a successful, highly valued enterprise. Unfortunately many of these same business owners are unable to take their seed of a business and transform it into huge tree of success. Fortunately, there are things that an owner can do to increase their business value and achieve top dollar when they’re ready to exit. These include:
Focusing on increasing cash flows and minimizing taxes.
Creating a better customer acquisition strategy, with no more than ten percent of revenues coming from your largest customer.
Hiring or training a successor to you, thereby, keeping the knowledge in the company after you exit.
Creating recurring or repetitive revenue, while growing cash flows and profit. Try to get cash before performing the service, if possible.
Effective and well-documented financial controls that result in correct financial statements A buyer will want to rely on financial controls that help them obtain financial statements that accurately report your company net profits. How can they judge if what you tell them is true if they can’t trust the numbers?
Without reliable financial statements and financial controls, it is very hard for a buyer to know how to make a viable purchase offer; your business could be viewed as “too risky.” With all of the other choices for their investment dollar, a premium offer may never come, leaving you with a potential discounted or unsalable business.
Benchmarking How does your business compare to your competitors? Do you know? If your company outperforms your competition, it is more likely to command a higher purchase price than another similar business. With all the “professional” buyers out there buying up companies in the same industry, this may be very important.
As I stated earlier, buyers want healthy businesses. From startup to exit, you can be a healthy business and we can help.