Business value from the buyer’s perspective:
The purpose of this article to help you understand what is important from the buyer’s perspective, and the main drivers in achieving the highest price possible when you sell. The better job you do in each area listed enhances transferable value to the buyer, as well as the ability of your buyer to secure long-term third-party financing for the business acquisition. This higher value means you will be able to command a higher multiple of Seller Discretionary Cash Flow (SDCF).
#1 Driver of Value: A trend of stable or increasing sales and cash flow
After finding a business that is the correct type, the next focus of a buyer is on the trend of gross sales and SDCF – how that relates to the asking price, and their needs. When there has been a steady or growing trend for more than one year, this adds value and invites a closer look.
#2 Driver of Value: Credible financial information and full disclosure
Just as current management has to have credible financial information, a potential buyer and lender for the buyer will require it as well. The cleaner the financial statements are, with a minimal amount of add-backs – typically described as seller expenses that the buyer will not incur – the better. Full disclosure of material factors that could affect the value of the business should be made at the beginning of the sales process. This establishes trust and credibility. Year-end financial statements that have been prepared by a CPA are better than a QuickBooks financial statement prepared by the seller, also add credibility to the offering and create a higher value.
#3 Driver of Value: Customer diversity
The concern of a buyer and the buyer’s lender when one or more customer represents more than 10% of annual sales is what will happen to cash flow should the company lose that customer(s). With this much of a concentration of sales in one customer, creates a substantial risk and reduces value. In many cases, having a customer that represents more than 10% of sales can impede the ability of a buyer to get long-term financing with a third-party lender, particularly an SBA guaranteed loan.
#4 Driver of Value: Employees
Ideally, almost all customer contact is with employees, not the owner. This makes the transition for the customer almost seamless, which adds value. Having the business build around the company, rather than the owner, adds value. A buyer will need to feel comfortable that employees will not leave with new owners. Long-term, well-trained employees who have good relationships with customers add value to the company.
#5 Driver of Value: Growth potential
Being able to provide a narrative that provides realistic opportunities to grow the business adds value. This can also draw attention and point out opportunities that a buyer has not considered. Some areas of growth may include:
- Optimizing and/or redesigning the company website to include a shopping cart, making it easier to navigate, with a more user-friendly format, can increase sales.
- Giving employees more training.
- Adding additional high-margin products or services.
- Adding new production equipment that is faster, requires less maintenance and is less labor-intensive.
- Expanding into new geographical areas.
- Reconfiguring workflow for improved efficiency and added production capacity.
- Expanding or remodeling the current facility, reducing clutter, and increasing productivity and workflow efficiency.
- Establishing business performance reports for management.
- Adding better telephone and e-mail systems to provide a better buying experience for customers.
- Creating an improved IT order entry system and equipment that is easier to navigate, faster, and gives better control of inventory and A/R.
#6 Driver of Value: Systems and procedures
Having documented systems and procedure manuals, detailing the various systems of the business, demonstrates that the business can be maintained after the sale. These include the sales process, order entry and process of manufacturing, as well as accounting processes and procedures. The following are a few examples of business systems that will add value to your business.
- Employee recruitment and training.
- An employee manual.
- Selection and maintenance of vendor relationships.
- Material and supplies procurement procedures and policies.
- Business performance reports for management.
- Process for identifying potential new customers and the sales process.
- Order entry, work flow and billing procedures.
- Accounting methods and procedures, checks and balances.
- Inventory organization and control.
#7 Driver of Value: Machinery, tools and the facility
A buyer will feel much more comfortable about the purchase of a business that has well-maintained equipment and facility. Before going to market, it is advisable to consider whether a fresh paint job or new carpet in the reception area are needed. If the facility is disorganized and has not been maintained, the buyer will typically discount the value, thinking the rest of the business – such as compliance issues, employee records and accounting records – has not been maintained, either. Buyers will give value to not having to invest in major repairs. Are the facility, tools and machines capable of modest growth? A buyer will not want to have to deal with the major disruption of moving for at least a few years after the acquisition.
#8 Driver of Value: Goodwill
Name recognition, Google ranking, branding, corporate identity and reputation are all part of business goodwill and have an influence on value. How customers are handled when they call, e-mail or visit the company, as well as the service and product reliability, do matter, and add value to the company.
#9 Driver of Value: Barriers to competitive entry
Having barriers that a competitor would need to overcome to succeed adds value to your company. Some examples include:
- Expensive equipment and tooling.
- Expensive facility/rent.
- Required leasehold improvements.
- Cost of inventory.
- Trademark/Trade name.
- Who the competition is – what makes your company different?
- Hard-to-get special licensing, permits, zoning requirements.
- Proprietary designs.
- Trade secrets.
- Proprietary computer software.
- Cost of marketing, new customer costs.
- Exclusive franchise/dealership agreement.
#10 Driver of Value: Product diversity
Since a concentration of customers that represent more than 10% of total sales presents an inherent risk, having a narrow line of products or services is also a concern to a potential buyer. Having a diverse product or service, catering to diverse industries, and a line with good margins