I am thinking about selling my computer repair business. We have three locations. The company is profitable but I’m bored. What matters most to business buyers?
Having served as an investment banker (professional who helps investors and corporations buy and sell companies) for many years, there are two primary factors that greatly influence the price and payment terms of business acquisitions.
The first is the number of active buyers who want and can afford to own your business. Note my equal emphasis on “can afford to own.”
Unfortunately there are too many lookie loos in the business buying community that can waste your time.
Once you decide to sell your company, you want to attract bidders who can afford to pay with cash or marketable stock. If you really want out of the business, then get out 100%. This means selling to business buyers for cash. You don’t want the buyer to pay you over time and risk never getting paid!
The second factor that can help you get top dollar for your business involves how active business buyers size up how a company’s position today will influence its growth prospects tomorrow.
Business investors often refer to the factors that influence business valuations as “business fundamentals” or “investment fundamentals.” Some fundamentals can add to the perceived financial value of a business while other fundamentals can lower the perceived value of a business.
For example, businesses that operate in fast-growing markets will get a valuation boost. This is because investors reason that in markets where there is active customer demand for a product or service, all competitors will find enough customers to stay in business.
In contrast, businesses that operate in markets where there is shrinking customer demand will receive a valuation “hair cut.” Why? Because smart business buyers know that companies that operate in shrinking markets eventually cut their prices to maintain market share.
Nasty price wars scare business investors. They don’t want to pay top dollar today for a business that is likely to have fewer customers and profits tomorrow.
Here are five more issues that smart business buyers think about when investigating a business that is for sale:
- Revenue predictability.
How stable is your company’s revenue base? Businesses that serve customers through multi-year contracts or can prove high rates of repeat business are valued more highly than companies that have to fight for every customer year after year.
- Reliable cash flow.
A company’s customer list says a lot about its value. Ideally, businesses want to have an impressive list of customers who pay their bills on time. Investors avoid buying businesses with high rates of customer service problems, product returns, consignment sales or discounted orders. At valuation time, expect a smart business buyer to discount the value of all these less profitable customer relationships.
- High gross profit margins.
High gross profit margin businesses have greater leeway to survive recessions and unexpected surprises. Every percentage point gain in gross profit margin performance not only helps boost business valuations but keeps good businesses in business.
Investors seek out businesses that generate 60% or higher gross profit margins or consistently deliver higher gross profit margins than industry competitors.
- Brand strength.
Valuable brands that are loved by their customers receive top dollar for owners at the time of business sale. This is because customers shop for what they want first and look at price second. Businesses can earn extra valuation bonus points if their brands can also be applied to other product or service categories in the future.
- Intellectual property advantage.
Businesses that own trademarks, patents, trade secrets and copyrights can rely on federal laws to protect their innovations from copycat competitors. But not all patents and trademarks are valuable. More valuation credit is given to intellectual property that generates revenues from licensing or truly blocks competitors from participating in fast-growing markets.
- Now you know what attributes of your business you can improve in order to get top dollar value at the time of business sale. You can do it!