The Top 8 Things Business Buyers Look for in a Business
Buyers want to lower their risk and maximize their investment. As a result, they look at various key attributes in a business, which helps them assess the risk within the company. There are eight key things buyers focus on: experienced management, barriers to entry , growth potential, leading market position, growing revenues and profits, high-quality financials, systems and processes and diversification.
First is Experienced Management. It’s really important to buyers that key managers have the experience, motivation, and incentives to stick around and grow the company.
Next is Barriers to Entry. This is all about positioning your business so that it’s difficult for competitors to enter your space and take away your market share, like technology, unique products, patents, copyrights, trademarks or anything else that contributes to your company’s special position.
The buyer wants expanding markets; therefore, they will be very concerned with your company’s Growth Potential — the third factor. Having a well thought out and realistic growth plan is critical to convincing buyers that they will not only recoup their investment, but make significant profits down the line.
If you have a Leading Market Position in your industry, that’s gold to the buyer. Additionally, you will command a nice valuation premium, because the buyer can leverage your dominant position to gain additional market share.
With Growing Revenues and Profits, buyers want increasing top-line revenues, bottom-line profitability and strong cash flow when buying a company. If your business has strong recurring revenue, this will also help drive up the price even higher.
Another key factor is High-Quality Financials. Buyers prefer to see audited and/or reviewed financial records so they can have trust in the quality of your earnings. If your financial data is unreliable, this will reduce buyer confidence and henceforth it will reduce the chances of the deal getting done at the targeted price — if it gets done at all.
The next factor is Systems and Processes. Good processes and systems within an organization mitigate risk for the buyer. These deliver repeatable results and create operating efficiencies that can directly impact operating costs and the underlying profits.
Last, but not least is Diversification of Customers, Suppliers, Products, Services and Industries. Diversification is fundamental to mitigating risk. Buyers prefer companies where no one client is contributing more than 10 percent of total sales. The more heavily a business relies on any one customer, the more vulnerable it is to drastic revenue swings.
In the case of suppliers, finding multiple places to source materials and supplies is crucial to long term stability and makes operations more reliable in the buyer’s eyes. The last thing a buyer wants is a mission critical supplier who is difficult to replace.
The trick to maximizing valuation in a sale is to know what the buyers look for and to plan ahead, to give them just that. Business owners who actually choose to plan tend to maximize value and they choose when they want to exit and they do so on their terms and timeline.
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