What every Entrepreneur and Business Owner should be aware of to build a business worth selling
By Jill Reamer, Enterprise Expert in Mergers & Acquisitions and Founder of Peak Strategy Advisors
With activity continuing to increase in the small and middle-market (to find out what a middle-market company is click here.) acquisition arena, potential buyers come knocking on your door when you least expect it. Women business owners and entrepreneurs need to think about the fact that if you decide to sell, will you be prepared to get the best price for your business?
Potential buyers will go over your P&L and balance sheet with a fine-toothed comb, but there’s more to buying a business than simply reviewing the numbers. Many characteristics influence a buyer’s decision and the price they pay. These characteristics have a lot more to do with how you manage the business than with what the numbers look like on your financial statements. To get the best price for your business, you have to pay attention to these critical areas long before the suitors come calling.”
In addition to the P&L and balance sheet, we have found that experienced buyers pay very close attention to the following factors:
- Consistency of performance. A company that increases revenues and profitability (in margin and in dollar terms) for several consecutive years presents much less risk to the buyer. Companies with variable or declining performance have less value because of the higher risk.
- Good reputation versus poor reputation. A company held in high esteem by suppliers and customers will usually command a higher price than one with a bad reputation.
- Broad customer base. Buyers tend to steer away from companies where one customer accounts for more than 50 percent of the revenues. A broad customer base lowers the risk profile.
- Long-standing customer relationships. Buyers will think twice about companies where the customers constantly come and go. It is too exhausting and very inefficient to have to constantly obtain new clients that do not return for repeat business. A company has to have some goodwill among a certain set of customers.
- Unique versus commodity product. A company that has a unique solution offers far more value to a buyer than one that competes against a multitude of companies with identical products or services. A large barrier to entry can hold a very large premium for any company that has a unique product offering. In fact, it is feasible that in some circumstances a company with less profit but a high entry barrier could carry a higher value than a company with greater profits but more competition. To find out what is the difference between product & commodity click here.
- Substantive market share. Is your market share increasing or decreasing? Buyers will pay more for market leaders or those gaining in market share. To find out what “market share is” click here.
- Quality of the management team. This along with performance consistency is perhaps the most important factor a buyer considers when making an acquisition, especially if the owner intends to exit the business altogether. If a company has not built a capable management team that can step in and do the job, a buyer will significantly discount the price or — more likely — pass on the deal altogether. To find out what a “management team is” click here.
- Synergy. A buyer who can absorb some of the overhead cost associated with a seller’s operations is called a synergistic buyer. Synergistic buyers are often more capable of paying a premium price since they are able to cut cost and receive a higher return for their investment. Most often the strategy to embrace when selling a company is to approach various targeted synergistic buyers so that an optimal price can be obtained.
To find out more about Jill Reamer and how Peak Strategy Advisors can help you reach your business succession or acquisition plans visit their web site by clicking here. Meanwhile we wish you much continued success.