When it comes time to sell your business, what will generate the most interest from potential buyers? What do you need to avoid? By knowing value drivers and value dingers, you can anticipate areas to improve/avoid to best position yourself for a favorable transaction when it’s time to sell. The more of these value drivers you can show your business, the more likely you’ll find the best buyer at the best price.
Value Drivers: What makes your company attractive to buyers in the market?
1. Steady, reliable and increasing revenue and cash flow year over year. Buying a business carries risk. When there are steady, growing revenue and cash flow streams, buyers can get comfortable that the business covers debt service and operates without requiring additional capital. Buyers avoid large peaks and valleys. If they exist, be prepared to explain them.
2. Strong management team. Every buyer wants to know the business will succeed post-closing. Is leadership in place to drive the business after you leave? Do they understand the business? Develop and prepare key employees to work autonomously and you set your business up for success under new ownership. If most of the company knowledge is in the seller’s head, the buyer is taking on a big risk. If you can go on vacation for 3-4 weeks and the company runs well without you, this is a good thing.
3. Effective manipulation of SG&A to get to EBITDA. Are your margins shrinking or contracting? Do you have pricing power? What kinds of labor or raw material costs are going into your margins? Does your business exhibit cost control? Companies with solid financial management and pricing benefits are valued better than ‘leaky’ businesses whose financial metrics aren’t as steady.
4. Exclusive territory. Operating in a region with minimal competition is less risky and makes companies with exclusive territory rights more valuable.
5. High barriers to entry. The harder it is to enter your market, the more valuable your business is. Buyers want a business with high barriers to entry to limit competition. Common barriers to entry include expensive equipment (i.e. heavy trucks, fabrication equipment), well-trained or well-educated employee base, proprietary property or extensive licensing requirements.
In next month’s blog post, we’ll uncover several areas that ding the value of a business and make it more difficult to sell.