Business Value Drivers Buyers Look For
This is a guest post from Chris Buono (see bio at end) – thanks Chris for sharing some great info…:
Each year, roughly 10,000 businesses change ownership. Those 10,000 represent only 20% of the businesses listed for sale. That means about 40,000 businesses fail to sell. Which such poor odds and stiff competition, what can we do today to make our businesses as attractive to buyers as possible? In this article, we put ourselves in the shoes of those likely buyers by highlighting the eight value driver areas buyers look to when determining the curb appeal of your business.
One of the first things you might notice about our value drivers is that they align with those departments common to just about every business. Our first is no different.
Put yourself in a potential buyer’s shoes. Imagine you’re down to a shortlist of two possible acquisition targets. Both are in the same industry, both have roughly the same revenue and net profit, both have similar reputations. The primary difference between your two contenders is: one has mature HR processes with a pipeline of qualified candidates, up-to-date employee records, job descriptions for all existing roles, and executed non-compete agreements for all key positions, and the other has none of these.
How much more would you, the buyer, be willing to pay for business A over business B? The answer to that question is somewhat subjective but suffice it to say that business A will command a higher sale price than B—likely significantly higher.
Whether your business is in the hospitality industry, financial services, logistics, or any other, your operations constitute the core of your business. What do buyers look for when considering a purchase? Buyers want efficiency, established systems, processes and procedures, anything and everything that ensures the business will continue to function as well after the sale as it did prior. Add to those systems an established training program and effective vendor management, and you have an operations trifecta. To command the highest selling price possible, your business operations should be able to function autonomously (or very close to it) under normal business conditions.
When distilled down, the value of your business is represented by its potential for future profits and cash flows. Of course, that doesn’t happen without customers. So, what do potential buyers look for in your customers? Buyers want a large pool of diverse customers. Any business with a small number of clients comprising the bulk of all sales is a business with higher associated risk. Conversely, when your customers represent a wide array of industries, no single economic impact will greatly impact your bottom line.
Beyond customer demographics, other customer-related factors affect a business’s value. Loyalty and stickiness both play a large role. Customer loyalty is generally well-understood and achieved by delivering something of value consistently and better than the competition. Stickiness, however, is achieved via business models that make it difficult for customers to switch to a competitor’s offering. This can be achieved by tapping into people’s natural inertia, instituting rewards programs, or via contractual obligation.
Sales & Marketing
Directly tied to customers is the area of Sales and Marketing. Where customers represent the sum total of your business efforts, sales and marketing are those established processes which seek to establish new business relationships as well as nurture existing ones.
If you’ve picked up on a common theme thus far, you’re sure to already have some insight into how to maximize the value of your business via sales and marketing. Potential buyers will place more value on a business that has a pipeline of new customers, especially when that pipeline has been generated by a proven sales process and marketing plan. Again, consistency and reliability are key factors.
Finance & Accounting
We’ve already touched on the fact that the value of your business is inextricably tied to its gross revenue, EBITDA, and cash flows. But the finance and accounting department can add value to your business in ways that transcend the bottom line. As we’ve mentioned, well-documented processes and procedures go far in improving the value of a business for sale. But, with generally accepted accounting practices (GAAP) and the like (e.g., IFRS), this is rarely a problem.
Then how can you use this department to eke out more from a buyer? In terms of finance, it’s all about having proper ratios—Working Capital Ratio, Quick Ratio, Debt-to-Equity Ratio, to name a few. These are all quick financial calculations that buyers (or buyers’ agents) will look at to gauge the health of your business. Knowing this, you would do well to calculate these prior to—or in coordination with—listing your business for sale, so you can improve these representative financial figures as soon as possible.
From a purely accounting perspective, you’ll want to make sure that any pseudo-personal expenses are no longer being accounted for in your business (e.g., the automobile lease for your spouse’s car). Leaving these expenses under the business provides a negatively skewed picture of the financial health of your business—one that is surely to raise a red flag for any potential buyers.
For many, technology or IT simply refers to the workstations and laptops—and associated software—employed by staff. Within manufacturing organizations, technology often includes production floor equipment. Within sales driven organizations, technology includes CRM and order entry systems. Within companies that engage customers via the internet or a mobile app, the underlying internet connectivity, cloud storage, and software development comprise the overall technology posture.
A business where technology assets have been neglected for many years can expect a lower sale price. On the other hand, a business where digital technology has been invested in thoughtfully and with customer experience at the forefront, can expect to command a premium sale price.
This business area is all about risk mitigation. Whether addressing the risk of liability and lawsuits, loss of intellectual property, or reducing exposure via partner agreements, ensuring that the risk exposure of your business is kept to a minimum will contribute greatly toward the perceived value. Similarly, ensuring proper insurance coverage contributes greatly to reducing the risk profile of your business. For many businesses, cleaning up this area will involve working closely with an attorney and trusted insurance agent.
Lastly, leadership comprise all the roles, processes, and decisions which steer the organization in the above areas as well as from a strategic, long-term perspective. Obviously, with the sale of any business, a change in leadership is inevitable. Furthermore, it is a well-known fact that people (i.e., employees, staff, vendors, etc.) avoid change whenever possible. How, then, do we marry these two opposing forces?
In preparation for the sale of your business, you will want to plan ahead for an eventual transition. You will want to do this for yourself, but you will also want to do it to position your business as ready for transition. Whether you share your plans for sale with your staff, managers, or senior leadership (we generally recommend not), as the head of your business you are ultimately responsible for ensuring that your exit does not cause unnecessary upheaval. If a potential buyer observes any indication that key staff or managers will leave the company following the loss of you, it may very well kill the deal at the last minute. Doing all you can to prepare your entire organization for your transition, and communicating your efforts to pre-qualified buyers, will certainly improve the curb appeal of your business.
One of the best ways you can leverage the tips herein is by planning ahead. Likely you already have at least some of the areas covered, but to get the absolute best sale price for your business, you’re going to want to address as many of our tips as possible—and that takes time. If you have one year or more to prepare your business for sale, it’s a lot easier to make the recommended changes than in a matter of weeks.
Chris Buono – LinkedIn Profile
Christopher Buono is an experienced enterprise leader now delivering topnotch leadership to midmarket and performance-potential companies. He has broad industry experience as a consultative leader uniquely capable of blending operational excellence, strategic planning, and a differentiated customer experience.
Shawn Kinkade Kansas City Business Coach