If you are thinking about selling your business, do you know what buyers look for in a business?
You probably have a number in your head. This number is what you think the business is worth. It may have come from a conversation with an accountant, from a valuation you heard someone else got, or a rough number based on your business turnover. This number makes sense to you.
If you sit down with a buyer, the chances are that number on the other side of the table is a bit different, often very different.
Why does this gap exists and how does a buyer come up with a figure that they’re willing to put on paper. When you understand what a buyer looks for in a business, it becomes obvious.
Two people look at the same business differently
When you look at your business, you’ll see the years it took to build it, the clients you fought for and won, all of the problems that you solved, the team you put together, and the reputation you’ve earned, one job at a time.
A buyer looks at the same business and sees risk!
These are two different viewpoints, and the gap between them can result in an unpleasant surprise. Everything your business has gone through, all the effort and heart ache, none of it shows up in a buyer’s calculation. What does show up is evidence, or lack of evidence. They want to see if the business will keep running the same way, after you have left. That’s the main thing a buyer is thinking of, and needs an answer to.
When a business owner thinks about what makes their business valuable, they’ll think of the same things. The number of years of trading, their solid revenue, a strong name in the market, and their client relationships. All of these things matter, and nobody will buy a business with a bad reputation and no clients. But they’re the absolute minimum that buyers are looking for. They will help to get a buyer into the room, but once they’re there, something else determines the number they’re willing to put on paper.
What buyers look for in a business
When a buyer goes through a business, they’re trying to build a picture of what it will look like without the current owner in it. They’re looking for five things:
1) Predictable Revenue
They do not look at one-off projects that have to be re-won each year. They want revenue that they can rely on from day one, without having to go out and replace it.
2) A Functioning Leadership Team
If all of the key decisions sit with the owner, is someone buying a job or a business? Buyers want to see if someone could run things day-to-day.
3) A Spread Of Clients
A client that accounts for more than 15-20 percent of revenue, is seen as a concentration risk. If that client leaves after the sale, the numbers may change significantly. A buyer will price that risk into their calculations.
4) Documented Systems and Processes
A new owner needs to be able to understand how the business works, without relying on the knowledge that lives in other people’s heads. If they ask “how do you do that” and the answer is “we just know”, then that’s a problem.
5) Clean and Clear Financials
Do you have three years of accounts, that tell the same story, with no unexplained peaks, drops, or one off numbers? Buyers want to see numbers they can understand and trust. Clean Financials For A Business Sale goes into exactly what they are looking for.
Can your business work without you?
Take the Business Dependency Test.
It takes less than 3 minutes and will give you a clear answer.
Where Most Businesses Fall Short
The majority of owner managed businesses have work to do on most of that list. It’s not a fault of how they’ve run the business, it’s just how most businesses operate. Owners are focused on running the business, instead of preparing it for someone else to run.
Revenue can be project-based and has to be re-won each year. Does the leadership team rely on the founder to make most of the decisions? Do two or three clients account for a disproportionate share of income? Do the key processes live in the owner’s head, or in the heads of one or two long-serving members of staff? Are the accounts filed on time and would they hold up to a detailed read-through by someone looking for reasons to reduce their offer?
None of these things make a business unsellable, but each one will change the conversation, and change the price.
The owner dependency issue is the factor that does the most damage. If a business works because the founder is running it, then a buyer faces a fundamental problem. The business they’re buying is a part of the person who is leaving. The Key Person Risk Nobody Talks About deals with this, and it’s the risk most owners are slowest to see in themselves.
Pride and value are not the same thing
You should be proud of what you’ve built. Building a business from nothing, keeping it going through the difficult years, serving your clients well, and creating jobs for people is an accomplishment.
A buyer isn’t looking at your history. They’re not paying for the years of hard work you’ve put in or the hard times you went through. They want to know what will happen after the keys have been handed over. They want confidence in what they are buying, and they can only go on the information they find.
How is the business structured? How predictable is the revenue? How capable is the team? What’s the quality of the information available? These are the questions that a buyer is looking to answer.
Goodwill needs to be backed up with something a buyer can point at and know if it will still be the same when the founder has gone”.
Everything on that list is buildable
Recurring revenue can be developed, leadership teams can be built up, client concentration can be reduced over time, your systems can be documented, and the financial records can be cleaned up and presented clearly.
But none of that can be done overnight, and none of it’s possible without a focused effort. For most businesses, it’s not about making dramatic changes, but about making s series of improvements, over a realistic timeframe. How To Document Business Processescovers the practical areas to focus on and the order that makes the most sense.
Time is the key component here. If you start two or three years before you want to exit, this is not hard to do. However, if you start six months before you want to sell, then your options are limited. The owners who get the best outcomes are the ones who started thinking about this earlier than they felt was necessary.
Now you know what buyers look for in a business, what would they see in yours?