The simple answer to this question is to master the fundamentals. To become the “right” business that buyers want, qualified prospective buyers look closely at the following criteria when seeking businesses for sale:
- Solid Cash Flow
- Strong Team
- Up-To-Date Equipment
- A Strong Market Position
In part one of this series, we discussed the viability of selling a business during the COVID-19 pandemic. We identified the types of business owners who are currently seeking new business opportunities.
In this installment, we will outline the fundamentals your business must achieve to attract potential buyers, increase the value of your business, and become the right business that buyers want.
Become The Right Business That Buyers Want
Solid Cash Flow
While some investors purposefully pursue underperforming companies that can be acquired for below market prices, most buyers prefer successful companies to mitigate their risk aversion.
Ideally, your business can demonstrate a strong cash flow that has grown consistently over the long-term. This will alleviate your prospective buyer’s perception of risk, and increase their optimism for the company’s potential. A solid cash flow will raise interest in your business, as well as what it’s worth.
A history of strong cash flow piques a prospective buyer’s initial interest; however, their decision to buy your business will be driven by their expectations for its success in the future.
Strategic buyers understand that a solid team will accomplish more together than any one individual. (Only the most egotistical buyer would think otherwise.) Unfortunately, many owners neglect their role of building a solid team. When the time to sell their business arrives, they discover the error of their omission.
Since owners often depart the business at closing or shortly thereafter, buyers evaluate the team that will remain. A weak team equals more risk for the buyer. Future success will require Herculean efforts on their part, or be delayed until a better team can be assembled.
You can anticipate more interest in your business for sale, as well as better offers, when you have a solid team in place for the transition.
The status of your equipment is important for two reasons. One, your equipment will impact the new owner’s future cash flow. If they’re required to invest significant funds in replacing outdated equipment, that will reduce their cash flow.
Most buyers use, as one of their valuation metrics, a multiple times expected cash flow. Thus, a smaller cash flow for them means a smaller offer for you.
The second reason your equipment matters is that buyers finance most of the sales price. Their bank will assess the equipment and base what they will lend, at least in part, on its value.
Since your equipment might serve as collateral to your prospective buyer’s lending institution, it can either facilitate or hinder the transaction.
A Strong Market Position
A business’s competitive position ebbs and flows. The idea that a business can remain in place is largely a delusion. Due diligence for a smart buyer will include an evaluation of your company’s market position. They will assess whether your business is gaining or losing momentum – moving ahead or falling behind.
Few businesses achieve a perfect score in this regard, which is why businesses sell for a broad range of prices. Today, the value of businesses that offer seemingly comparable products or services can vary greatly. If your business is not where you want it to be, you will need to take some off-setting steps to capture buyer interest. Our next installment will delve into the steps for success.
Acuity Is More Than A Business Broker. We’re Business Transaction Experts.
Acuity Mergers + Acquisitions assists privately held businesses through successful ownership transitions. Our expertise extends to both buy-side, as well as sell-side representation.
We purposefully service businesses valued from $500,000 to $20,000,000, because the business owner of this size company rarely has the time or resources to dedicate to buying or selling a business.
If you’re planning to sell your business, we encourage you to investigate the process that we’ll follow to help you prepare your business for sale, and then proactively market your business to prospective buyers.
When you’re ready to discuss your business opportunity, please contact us at 260-615-1644 to schedule a consultation.