Business Owners, who are looking to sell their business, often ask about the type of person looking to buy a business. In summary, today’s business buyer is a first time buyer who is looking to replace their current job, but is not a risk taker. If you are interested in a full analysis of Today’s Business Buyer, read more here. Often, the next question a Business Owner will ask is two-fold:
“What exactly do buyers look for when purchasing a business?
And how can I use that information to my advantage?”
The 5 Keys to Consider When Purchasing a Business
There are 5 primary items that Business Buyers are looking for when they are considering a business for purchase: Profitability, Customer Concentration, Documented Systems, Clean & Organized, and Limited Owner Dependence. As a Business Owner, knowing what a Business Buyer is looking for gives you a great advantage! It can help you make business decisions that will positively affect the eventual sale of your business. If you are considering selling within the next few years, consider implementing the tips in this article to maximize the appeal of your business to potential buyers.
- Profitability: This seems like an obvious one, but it is one of the most important items that Business Buyers look at. However, there are many Business Owners who try to minimize or hide profits from the IRS to minimize taxes. This becomes an issue when they get ready to sell their business. This is because the Business Buyer and their bankers can’t see the additional money and that can make them nervous. The more document profits on your tax returns, the higher the selling price for your business.
- What can you do? At least 3 years before selling, stop running personal expenses through the business and utilize “normal channels” to pay yourself. This would include W-2 wages, draws, dividends, or management fee.
- Consumer Concentration: There are many small businesses with small customer concentration, meaning they focus on small number of customers. When a Business Buyer sees a business with one customer making up more than 20% of the revenue, they become nervous. There are two reasons for this nervousness, although both reasons deal with bank loans. If the buyer gets a bank loan to purchase the business, they will not have the same cash flow as the current owner, especially if the current owner owns the business without debt. The second reason for nervousness is the high potential for bankruptcy. If the buyer loses a large customer and is unable to pay their bank loan. What can you do? If you know that you potentially have an issue with your consumer concentration, you must branch out, dilute, and diversify your consumer concentration. Try to add some new customers to diversify your business and minimize the risk for buyers.
- Documented Systems: If you’re running your business based upon knowledge in your head, get that knowledge on paper and share it with your management team. Not only will this empower your management team, this will also put the next owner on the path to continue your success. Business Buyers are willing to pay for a business that has good practices already established.
- What can you do? Get everything out of your head and on to paper where it is easily accessible. This includes all procedures, all employee expectations, etc.
- Clean and Organized: This one also seems obvious but it is also extremely important to a Business Buyer. First impressions matter!
- What can you do? Take a look at your business as if you were going to purchase it. Where could you improve? Remove clutter, deep clean your space, make minor repairs, and repaint, if necessary.
- Limited Owner Dependence: This is by far the most important issue to a buyer. If you are required to work in the business to make the business successful, it will extremely difficult to sell your business. While most Business Buyers have management, finance, sales, or operational skills, they may not have the technical expertise required.
- What can you do? You have several options here. Hire someone with the technical skills required. Train one of your staff members. Directly train the new owner, if they are interested. Regardless, you have to be sure that someone else has the technical skills to keep your business on the path of success.
As you are thinking about your exit strategy, keep a potential buyer and what they are looking for in mind.
It will help you get the most for your business in the long run.
If you are interested in learning about exit strategy, click here.