Ah yes. Sun-drenched beach villas, cool cocktails and a new Jaguar. Is there a business owner out there who hasn’t imagined their glorious exit in a flurry of cash?
Even if you have no plans to sell your business at the moment, it is a great exercise to see your business through the eyes of potential buyers. If you are ruthlessly honest in your answers, you’ll expose key weaknesses to be fixed and find new ways to make your business stronger and more valuable. Result: a healthier company – and maybe one that’s worth selling.
So here are the key questions a buyer will ask:
What have you got?
This is really basic. What do you have that a buyer would want to get his hands on? Examples include recurring revenue streams, satisfied customers, a wide customer base, a good reputation, geographical reach. Buyers might be interested in a particular group of customers or a supply chain. If you have a unique process, technology or patent then you are very well placed.
Where’s the potential?
Buyers are not buying your past – they’re interested in the future. So they might be intrigued by underexploited markets, new products or complementary products or services that they can cross-sell. A well-differentiated or niche offering will definitely help, as will a growing market.
Who’s going to run it?
Buyers don’t like businesses that depend too much on the owner – if she leaves, she will take the customers with her. They will generally prefer a professional management team with well-established systems and procedures. Show them proper documentation and manuals. Demonstrate that the business can be scaled up easily and the value of your business gets a boost.
Why are you selling?
If this company is so great, why don’t you want it any more? Is the market in decline? Are you in trouble? Let’s hope not. Good reasons include retirement or that you have other interests to pursue. Another legitimate reason is that you’ve taken the company as far as you can and it needs a new owner to realise its potential.
Ah. Never name a sum: whatever you say here will be the absolute maximum you could possibly get…. but hey, this is just a strategic exercise. For now it’s enough to ask how much do you need to make it worth selling. Could your company realistically be worth that? If not, how are you going to add to its value?
How is the business performing?
Having answered the above, any buyer will perform lengthy due diligence on your business plan and your numbers. Make sure that your projections are sound and that you are hitting your targets.
If you’re thinking of making an exit, don’t underestimate this last question. Failure to achieve projected performance is the main reason buyers pull out of the process, and shortage of cash is another major obstacle. Any doubts about margins or financial structure will enable the buyer to chip away at the price.
Proper, sustained cost management will help to prevent this. Keeping overheads and business costs under control means retaining every penny of profit, and so boosts the cash price of the company.
- most valuations are based on a multiple of EBITDA, so a dollar saved in costs is multiple dollars added to business value.
- cost management adds cash to the balance sheet – enhancing an asset that buyers have to pay for
- it improves cashflow – very attractive to buyers
- at the same time, it reduces working capital requirements – a major issue for a growing company.
Remember, buyers will use your last three years’ accounts as a basis for estimated future profit, so don’t leave it to the last minute. Start work now – your business will be better for it – whether you sell it or not.