What makes a buyer pay more for a business?

Of course a business, like everything for sale, is worth what a buyer is prepared to pay for it – but what would make a buyer pay more?

Experienced buyers will always have a price in mind, calculated on a range of factors of which financial performance is probably the most obvious but not always the most important.  Whilst sellers also will have a price in mind, in my experience most business owners arrive at a value based mainly on personal desire.

That “value gap” can be bridged; sellers can, with time and careful preparation, increase the worth of the business and also take steps to reduce a buyer’s transactional risk – something that ultimately benefits both parties.

For a buyer, trade acquisitions carry considerable risk so, when considering what would make an acquirer pay more, it helps to look at this from two perspectives:

1.  Reducing Risk
2.  Strategic Fit

 

1.  REDUCING RISK

Let’s start with the financial picture.

Your published results are what they are and you’re selling the future – right?  So you need to produce financial forecasts that you can explain and substantiate.

Yes, you will need to produce monthly management accounts that demonstrate the business is on track to meet its forecasts but just as important you need to be able to explain the assumptions you have made and the basis on which you have made them – for example sales and marketing initiatives, forward order book, recently renewed contracts, competitive intelligence etc.

A buyer will calculate the return on investment to be achieved by buying your business above another so make sure you have a robust financial argument that underpins your company’s growth potential.

You must be able to prove that the business has a future without you at the helm

Would you pay a premium price for a car without an engine? Unless it was an extremely rare item, probably not. So unless your business has something so unique and valuable that a buyer will pay more for it, make sure your business does not depend on you.

Focus on creating a strong management team – that might mean investing in training for potential candidates but your investment will be repaid several times over. Why? Because acquirers buy a business that they expect to function successfully and, just as important, grow under their ownership.  It is very difficult for an acquirer to consider a high value for your business if you are the main decision maker in the company and the business depends largely on your skill set.

If you are concerned about your employees leaving once the business is sold, consider incentivising them but do take legal advice before you decide how best to do this as there are tax considerations to take into account. If you don’t have a commercial lawyer you can find a selection on the Partner page of our website.

If possible, start working on staff related issues at least a year before you plan to start the sales process.

Diversify your customer base

Put an acquirer’s hat on. Would you buy a business where a high percentage of revenue comes from just a few customers? Again – unless you business has a particularly unique “something” – you can reduce transactional risk by ensuring that no single customer contributes more than 10% of your revenues (or your profits). If possible establish long term contracts with your top 5 customers then work towards diversifying your customer base. Review your sales and marketing plans to get this started.

Just as in the previous point, the risk for a buyer is that YOU hold the key to certain essential elements of the business and that increases a buyer’s risk. If you choose to sell without putting these things in place you should be prepared to accept an “earn out” as part of the transaction value, possibly having to stay on in the business for a period. Consider very carefully whether you could actually work for someone else in the business that you founded?

Create recurring revenue streams

I touched on this earlier, but to take it a little further than long term contracts, consider whether you could introduce annual service or licensing contracts. For example, if your business is in the services sector you might consider a range of chargeable support options . Anything you can do to make a proportion of your revenues reliably predictable will increase its value and make it more attractive to a buyer.

Look after your cash

This may sound obvious as you will be doing this anyway but in a sale situation cash management has other implications.  Rather than slashing costs to improve EBITDA, work towards long term sustainable improvement.  Don’t make cash savings to the detriment of productivity, thereby threatening your financial forecasts. Take professional advice before you make any drastic cuts as Acquirers will be suspicious about sudden short-term changes in cash flow and will start to doubt your credibility – resulting in valuation changes to offset the perceived risk.

2.  STRATEGIC FIT

All the following also reduce risk but they make take a bit of time in preparation; however they will add value to your business whether or not you decide to sell. Some of the points can be implemented without significant change, others may be a bit more involved.

Barriers to Entry

A major reason a buyer would pay more is to break down the barriers preventing his business achieving success in a particular market or even a particular client with whom you are contracted. Your company could be one of a few approved vendors for a particular company or market sector and if that market is highly regulated and expensive/time consuming to enter, your business will be more valuable.  Similarly, you might have long-term contracts and good relationships with companies that the buyer’s business is targeting but can’t get into.

Products and Services that are hard to copy

Buyers will place a higher value on a company with unique products and services, especially if they are hard to copy and legally protected.  You may also have created specific processes that make your product or service hard to copy for various reasons.  These competitive advantages have real value to an acquirer, so consider ways in which your products/services/processes are unique and why they make your business more valuable to a potential buyer.

Industry Exposure

Many business owners are well known industry experts in their field, speaking at industry events, writing articles, appearing on radio or TV. Do you regularly submit articles for trade magazines or issue press releases? There is an intangible value associated with perceived industry leadership and it adds value and saleability to your business.

Weaknesses are a positive

When you’re selling a business a buyer will want to identify areas where they can add value and speed up return on investment. If your business is perfect you deny them that opportunity and will consequently reduce the value and saleability of your business.  This is a matter for your business strategy and planning as you need to identify areas of your business that can receive less focus or investment without risking achieving your targets. What you don’t want to do is hide bad news – don’t try to do this; it will only cost you more in due diligence and may scupper the deal. Talk to your advisers so that it can be dealt with in the best way possible.

Documented processes and good record keeping

These give acquirers comfort that the business is well run and that it is not completely owner-reliant. Good financial records demonstrate that you are in control of your business and will be of great help to you during due diligence. Also, knowing your numbers and how you will achieve them is essential during negotiation meetings. The reverse is also true as acquirers will be highly suspicious of your forecasts and will be less likely to make a good offer for your business.

In conclusion, EBITDA does matter but it isn’t everything; it’s the starting point for negotiation.

As with everything, the better you plan the more successful you are likely to achieve the results you want. Take time to put together a fact pack and growth plan for your business; it needn’t be a lengthy document or take months to prepare but it will help you focus and, when you decide its time to sell, it will help your advisers and impress potential buyers.

For more information about exit strategies, please come to one of our regular events. Full details are on our website – www.evolutioncbs.co.uk/events

 

Rob preferred

Rob Goddard, Managing Director

Evolution Complete Business Sales Ltd

 

Comments are closed.

© 2019 Evolution Complete Business Sales Ltd.

  Keep me updated
KEEP UPDATED

Dear visitor. Please subscribe if you'd like to receive updates and events on selling or buying a business

* we hate spam and never share your details.
×