But check out the following 8 criteria that WILL…
Sue’s Story: Sue was planning to sell her company and use the proceeds for her retirement. She’d worked hard to grow the business for the past seven years, had eight exceptional employees, and based on ‘industry multiples’ figured the business was worth $2.5 million sold as an ongoing operation with strong cash flow. That was until she got a qualified business valuation.
Despite being a great business, most of the ‘good will’ in the business (relationships, reputation, and technical knowledge) was still attached to her personally rather than to the business. Essentially, Sue realized that she was the business, inadvertently making the company unattractive or even unsaleable to prospective buyers.
To make the company saleable AND to optimize the sale value of her company for her retirement, Sue recognized she would have to transition her personal knowledge and management of customer relationships over to the company by having her management team ‘take center stage’ and assume more responsibility, authority, and profile, while ‘learning the ropes’.
Sue’s experience is an important reminder to us all when looking to sell or pass down a business. Too many owners are essential to their business. Is this describing YOU?
Do a Self-Check: If your business is too dependent on your business acumen, your technical knowledge, your business relationships, or your reputation and brand – you are quite likely:
- Reducing its likelihood to sell;
- Decreasing its potential sale value;
- Hindering your successor’s chances of continued success or growth; and/or
- Risking your business’ and employees’ livelihoods unnecessarily should you become unexpectedly unavailable or incapacitated.
Prospective buyers will not be valuing your business based on it’s ‘past’ performance (although it’s a starting point and initial indicator), but rather on its ability and likelihood to deliver and sustain ‘future’ performance and growth’ independent of you.
Determining ‘future performance and growth potential’ (and therefore sale-value)
Let’s look at 8 KEY CRITERIA THAT PROSPECTIVE BUYERS WILL BE LOOKING AT to assess the likelihood of your business continuing to deliver sustainable performance and growth in the future:
- Your industry and marketplace – Is it healthy and robust? Is it trending positive, stagnant or in decline? What’s it’s competitiveness, number of players and saturation? What are the fundamental drivers for your product or service, and their volatility? What’s your market’s untapped potential? What’s the future ability/opportunity to differentiate your business from others and to grow? (Prospective buyers will have typically researched this before they even meet with you, and/or may have already pre-selected your industry because of their knowledge or its growth potential.)
- Your current/past/projected performance – How have the past 3-5 years financials trended? What’s the quality and repeatability of your earnings? What’s your customer/market mix and diversification? What’s your typical sales cycle? What’s your mix of ‘one-off’ sales and recurring sales? What’s the reliability and transferability of supplier/vendor relationships? How much of earnings are under contract versus hand-shake? How well has the company been managed and performed? What’s it’s current reputation in the marketplace?
- Your unique and differentiating features – How does your value proposition or offering differ from others? How easy is it to duplicate or replace? How easy is it to understand? How fast or complicated is it to adopt or implement? Is your unique IP or knowledge owned by the business, protectable and protected? Is your offering a ‘one-off’ application or can it be expanded into multiple applications or sectors?
- Your company leadership, culture and values – Does your team have the ability – passion, leadership, skills, business aptitude/acumen – to succeed and to grow? Is there strong leadership and culture in place independent of the owner? Is management knowledgeable, independent, and aligned? Is the organizational structure appropriate? Are ‘people management’ systems in place and being used? Is there focus on talent and people growth? How is employee retention and/or turnover?
- Your business and operating independence – Is the business acumen, goodwill and brand attached to business (rather than the owner)? What performance accountability processes are in place? What freedom and authority does management have to operate and make decisions? What is the jurisdiction or regulatory environment? How restrictive are industry regulations, bureaucracy, reporting and licensing requirements?
- Your business processes, technology and assets – How ‘current’ are your business systems and practices, your information management and accounting processes? Are you using state-of-art business technology (i.e. ERP, CRM)? What’s the age, quality and condition of equipment and assets?
- Your ability to grow, diversify or build onto – How aligned is the business with buyer’s current activities? What’s buyer’s knowledge/comfort with your business or sector? What’s the business’ capability/bandwidth to grow? What barriers to entry are there – formal and informal? What ‘bench strength’ is there in technical and management skills?
- Your ease-to-buy – How free is the operating business of family ‘entanglement’, legacy or other issues/encumbrances? Does it have a simple ownership structure? Do you have reasonable price expectations? What terms, conditions, timing are you looing for? How simple/smooth a transaction will it be? Will retention of key personnel be an issue? What transition assistance are you prepared to provide? How open and truthful are you being of your business and its potential? (Buyers will shy away if they think you’re hiding something.)
Exceptions to Every Rule – Keep Your Options Open
Despite all your hard work and diligence above, strategic buyers may not be considering the value of your business as an ‘ongoing entity’, but rather may be looking to acquire specific attributes – your business knowledge or IP, product line(s), brand or reputation, geographic territory, customer list or vendors, business processes or other things. There is a myriad of reasons potentially at play OTHER than being a well-run, high-quality business.
If able, try to understand WHY the prospective buyer is interested in your business. It allows you to strategically position yourself for a better sale by focusing on/profiling attributes of most value. If their interest in acquiring your business does not align with your interests in selling, you may choose not to sell or may choose to wait for another buyer. Better to know this earlier rather than later in the process – too many deals have turned sour late in the process due to misalignment, changed expectations, or ‘surprises’ on either side.
The Bottom Line
As in the movie Field of Dreams, “build it [right] and they will come”. People typically know a quality, well-run business when they see it – your customers, your employees, your suppliers – everyone you interact with INCLUDING prospective buyers. Focusing on the 8 criteria will help you build a better business. Instead of doing it for someone else, why not do it for yourself starting today?
Be Bold, Think Big, Be Curious, Keep Focused!
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