When we talk to business owners who are ready to sell their business we spend a lot of time reframing their view. There’s a big difference between being an entrepreneur who’s built a business and the same business owner who’s decided to sell their company. We talk about looking at their business from the buyer’s lens and what’s important to them. About restructuring their business into a “built to sell” company and uncovering their hidden value that attracts buyers who will pay you what your business is worth.
This is an important step for an owner. Buyers are looking at a specific set of drivers that show the value of the businesses they’re evaluating. A common set of criteria if you will that separates the average companies from the great ones. Over the years, we’ve done a lot of research and learned through our own exit planning and brokerage teams what’s a nice to have versus an almost universal need of most buyers.
Here’s what we’ve discovered:
- Financial Performance. Your financial performance is critical and might be a deal breaker right out of the gate if you don’t meet the buyer’s investment criteria. It’s why you need to make sure your financial and accounting records are clean and up-to-date. It’s your company’s best representation of your performance over time. Errors and irregularities are often deal killers right from the start.
- Customer Satisfaction. We all like satisfied customers, and buyers are no different. But they look at this a little differently. Strategic buyers hunt for companies that have a high potential for growth, because they know they can scale them. The key is measuring your customer’s satisfaction with your business in a unique way to showcase companies with a high potential for growth. To do this, we like to get our customer’s net promoter score by capturing their customer’s response to this question, “On a scale of 0 to 10, how likely are you to repurchase from our company and refer our company to your friends and colleagues?” People who give you a 9 or 10 rating are your promoters, those who give you a 7 or 8 are your passives, and people who give you a 6 or below or your detractors. You take your percentage of promoters and subtract your detractors percentage to get your score. Let’s say you get 100 respondents from your confidential survey, and 50 give you a 9 or 10, and 18 give you a 6 or below. You’d have a net promoter score of 32 (50 minus 18). Since the average business scores a 15, and world-class brands score a 50+, that’s pretty good and definitely better than average.
- Growth Potential. Buyers are looking for companies that have the potential for growth and having the right product and service mix in the right markets. It’s also, putting on the buyer’s lens, an indicator of how rapidly they could grow your business by bringing in their working capital and size to scale.
- Recurring Revenue Potential. Some buyers are willing to pay two to three times revenue for companies that bring in a large part of their revenue through subscription models, which is significant. When you compare that to most valuations multiplying your net profits by a multiple to arrive at your company’s worth (I’m oversimplifying, but you get the idea). We’ve written a blog that goes over the nine subscription models that is worth a read, especially when you see the potential for your company and the value created.
- Monopoly Control. Most of us have played Monopoly or at some point heard of it. It’s a simple board game where you build houses and convert them to hotels, with the goal of making all or most of the money from your fellow game players. You want to corner the market and create a monopoly, hence the name. Buyers are wanting to see that your company and your products and services – your brand – is defendable against your competition. And they want to understand your unique value proposition that resonates with your customers. That separates you and makes your customers raving fans who want to not only buy more of what you sell, but they want to tell their friends and colleagues, too. (see how these intertwine?)
- Owner Freedom. We’ve spent a lot of time on owner-dependency and its impact on your company’s value. Businesses that are dependent on their owners, even synonymous with them, are essentially worthless to buyers. Buyers know to be successful with an owner-dependent business they’ll need the owner to come work for the buyer for upwards of five years for the buyer. This structure is an earn out, and a percentage of the sales price for the business is held back and earned by the owner when they meet agreed-to growth targets over time. Reducing your business’s dependence on you, the owner, will have an immediate impact on the value of your company, and it will allow you to get all or most of the purchase price up front, which is significant.
- Business Dependency. If your business is dependent on any one (or a few) key customers, suppliers, or employees, you’ll raise an immediate red flag with buyers. There’s risk in buying your company. What if you get most of your products or inventory from a key supplier, and the supplier raises prices or takes a lot longer to deliver? How about if they walk away from you? Is there a key customer who brings in 40% of your revenue and decides after the sale of your business to take their business to a competitor? Will the buyer have to fire a lot of employees to get the operations in line with the reduced sales? And what if a key employee leaves the company upon learning that the business has been sold? Is there a key employee who sells a majority of your products and services? These are all risks that buyers think about, and they will likely walk away from deals when they see these issues, or they’ll significantly lower their asking price to compensate for the risk.
- Positive Cash Flow Engines. We say this a lot, and you’ve heard it before as an entrepreneur: “Cash is king.” Companies that bring in a lot more cash for every sale they make are very valuable and sought after by strategic and financial buyers. These businesses can really scale and need a lot less working capital to run, since they are flush with cash. Remember, you want cash coming in much faster than cash going out. When you’ve created a positive cash flow engine for your company, you’ll increase the value of your company, and you’ll attract buyers who hunt for these situations.