When you are considering an exit, you must know what your “market” wants to buy to achieve your best sale price. Depending on the scale of your business, you will attract three different kinds of buyer.
- Strategic Buyer – this kind of buyer is looking for synergies in acquiring your business. New market entry, new product development, new economies of scale that will be facilitated by buying your company. They’re looking at the purchase from the point of view of a larger plan, often seeking to combine various companies to exploit very large market opportunities.
- Financial Buyer – this kind of buyer is looking at how they can buy your business, make changes to scale or grow it on its own and then sell it on at a higher price.
- Lifestyle Buyer – Also known as the Management buyer, this kind is looking for the stability and security of an industry they know and a business that suits their ambition. They have no grand plan and don’t intend to sell the business inside a few years.
All buyers will have some common information they need to know, although their ability to interpret it may vary. They will want to know the answers to questions like these:
Is the business profitable?
All buyers want to know that the business is capable of making enough profit to repay their investment. Strategic and Financial buyers will expect that they can scale up or reduce cost in the business to improve profitability, but all buyers will regard a trend of profitability favourably.
Does it work without the current management team?
If it can’t work without current senior team members or key employees, a buyer will regard your business less favourably. You must be able to demonstrate that the business does not rely on any one employee too much to succeed.
What competitive advantages does it have, and how stable are they?
Understanding how your business is placed in relation to industry competitors is an important part of the sale. The more protected your position, the higher the price you can expect. Strategic and Financial buyers (who are typically able to pay more for your business) are interested in the opportunities that come with competitive advantage – this is an area where you can drive a premium price.
Are there cost reduction opportunities? Alternatively, does the business have a demonstrated history of above average returns?
The Strategic and Financial buyers will be looking for parts of the business they can strip away in order to expose more profit. Conversely, all buyers will be pleased to see that operating expenses are constantly minimised and profit opportunities are maximised in the current business – you will attract a premium price.
Is there sufficient diversification among the clients?
Businesses that make a decent profit, but do so by working with only a handful of clients are at risk of a shock if one or more of those clients is lost. Achieving diversification so that no -one client accounts for more than 5% of turnover is key to mitigating against that risk and improving sale price.
Are customers locked-in or can you demonstrate their loyalty?
Your financial statements are a reflection of history. All buyers will discount the value of your business by a factor they believe is appropriate to cover the risk of varied performance in the future. Being able to demonstrate that clients are locked-in for between one and five years will mean a lower discount rate applies.
How easily can it be scaled-up?
The Strategic and Financial buyers are interested in the opportunities for expansion and growth. Is your company largely process-driven, or more haphazard? Could operations be stood up in a new market with relatively little hassle? Can its products be manufactured on a larger scale if demand grows? Easier scalability = a better price.
Is the brand credible and respected?
It’s hard to measure the value of a brand, but it’s easy to tell when a brand has gone bad. Online reviews of your products or service will be an excellent indicator of whether there’s any value in the longevity of your brand(s). More credibility leads to a higher sale price even when it’s hard to measure.
How clean are the accounts? Are there any lurking skeletons?
It goes without saying that by the time you’re ready to sell your financial statements should look pristine, with any anomalies between periods ironed-out or noted with credible explanations. Likewise, buyers will expect to see that all legislative obligations have been met. The more proactive you are about showing how clean and unencumbered your business is, the easier the sale.
Have current results been driven by a plan? What is the plan going forward?
All buyers will look more favourably on a business that can demonstrate its results are not just the result of good fortune but rather, are driven by the execution of a plan that is current and used as a living document, not just a once-a-year effort.
You can sell a business at any time, but you will only achieve your best exit when you sell a money-making machine and/or one with unique opportunities in its market that can be exploited.
A buyer is looking for the evidence of either and the easier they can see it, the higher your return will be.
For a structured approach to giving your future buyer everything they want to see and more, let’s talk. Call us on 1300 36 20 27 or send a message from our Contact page.