I strongly believe every business is saleable. Top performing businesses in a desirable market will always attract considerable buyer attention. What about underperformers that operate in less desirable markets? Yes, they are sold too. Every business is saleable provided the owner is flexible with price, deal terms and the time it takes to sell.
If you’re like most owners, you want to cash out of your business at the peak of the market for the highest possible price tag. Of course you do…who wouldn’t?
Some aspects of a business sale are out of the owner’s control. For example, a business owner cannot dictate interest rates and the ideal buyer may want to finance your transaction. What’s more, your market segment may have fallen out of favor with non-industry buyers because of regulatory changes. Hopefully, you’re lucky enough to sell your business when the proverbial macro, corporate and personal stars line up perfectly. Unfortunately, there will always be aspects of a business sale that are out of your control so remove luck from the equation and start focusing on the aspects of your business that you can influence.
Here are my top five reasons why businesses don’t sell for the top price in their market and what an owner can do about it now.
1. Failure to capture the true operating income of the selling business. Most businesses are sold based upon a multiple of its earnings. Buyers prefer to acquire a business with little recasting needed to “normalize” operating income. Most recasting revolves around owner’s discretionary income. For example, an owner may pay himself more than fair market value for his position. Instead, the owner could start paying himself fair market compensation for his position and the rest will drop to the bottom line. Making these changes years in advance of a sale better positions the selling company to maximize its true operating income.
2. The business is dependent upon the owner(s). Buyers will pay more cash for a business whose success is not dependent on the owner’s day-to-day operational involvement and key client relationships. A business that is well positioned for a sale should have experienced management in place that can run the business and make strategic decisions absent the owner. A good test is to take an extended vacation, don’t schedule planned calls with management and see what happens. If you are concerned that your business may not operate efficiently while you’re on vacation, know that a buyer will have greater concern when it comes time to sell.
3. Concentration exists among the top clients. A buyer will typically raise a red flag when too many eggs are in one basket. Good rule of thumb: if your business has a single customer who represents more than 20% of your revenues (or profitability), a buyer will perceive concentration risk and will seek to structure a transaction around retention of that client. There is a significant risk for buyers and their lenders if the loss of a single customer can impact the financial performance of a company. Many owners ask me if they should turn down new business from an existing client that might create concentration risk. Of course not, especially if that incremental growth is more profitable. Knowing that concentration exists years before selling gives you time to increase revenue derived from other clients. If you wait until a sale to recognize this issue, the result will most likely be a lower price or less favorable terms.
4. The business does not pass the eye test. Walk around your own business. How does it look? How does it really look? Are the work stations uniform. Are light fixtures tightened? Is the paint fresh? First impressions truly matter. I once walked around a seller’s operation with a buyer for an initial site tour. Shortly after we started, the buyer noticed a computer chord coming out from under a cubicle. He pointed this out to me and stated that he would not buy that business. He said the owner did not pay attention to the details and in a call center operation details are the difference between success and failure. I am not suggesting you need to purchase top-of-the-line furniture but you do need to take pride in the furniture you have.
5. The seller fails to reinvest in the business. The owner knows the operating system is past its prime but it works. The staff is crammed into the business instead of having adequate space to perform their services. The owner is making a choice to take the money out of the business along the way instead of reinvesting back into the business to be in position to achieve maximum valuation when it comes time to sell. Owners can’t have it both ways. Buyers will require capital expenditures are incurred or take the perceived amount off the purchase price.
There are a host of reasons why one business sells for top price while another sells for a lot less. Buyers are seeking to acquire businesses that engender confidence. Once skepticism and concern arises in a buyer’s mind, a successful sale transaction is highly unlikely. Looking at your business through the lens of a buyer is half the battle. The other half is doing something about it.