Selling a business? Weaknesses can be a good thing!

Aside from financial performance, acquirers are looking for growth potential in a target business. It’s a key indicator of the likelihood of the business to deliver an acquirers required Return on Investment (ROI). After all they aren’t buying the past!

Some of that growth potential is going to be found in the weaker areas of your business. For SMEs it is often weaknesses in Sales and Marketing that offer the greatest opportunity for acquirers to grow the business.

To give you an example of this, Evolution CBS recently completed the sale of a company in the Fire and Security sector. Our client’s strength was in the quality of its services and it had an excellent reputation within its industry and within its diverse client base. However, with no dedicated sales and marketing function, it had only scratched the surface of the potential sales it could achieve.

Whilst the owners recognised this as a weakness in the business, they were keen to sell quickly and therefore did not want to invest in creating a sales and marketing team. However, they were able to identify and quantify the opportunity this weakness could offer an acquirer, particularly to one with an established sales and marketing function.

The company that acquired our client’s business was quickly aware of the synergies, which in this case were:

  • Ability to expand an existing complementary division
  • Provision of critical mass
  • Acquisition of a blue-chip client base
  • Expansion of its geographical coverage
  • Opportunities to cross-sell products and services

In another case, I sold a business for what turned out to be a multiple of over 14 years adjusted net profit. This was largely because the acquirer identified the opportunity to turn a weakness, in that case no on-line ordering facility and decentralised purchasing, into a significant opportunity that could be achieved within the first year following acquisition. So whilst the seller was achieving a multiple of 14 times adjusted net profit, the financial effect of those 2 changes alone meant that the buyer’s calculation was a multiple of 5.

So it is a mistake for sellers to think that they need to perfect the business before marketing it for sale. In fact, the ideal situation you want to achieve in the buyer’s eyes is that you are doing almost everything “wrong”, yet the business makes money year on year! Almost that your business is growing despite the weaknesses.

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