If you are considering selling your business, you likely have a straightforward approach. All I need is one right buyer who likes my business, has the financial means and vision to make a purchase, and is genuinely interested in a deal. That makes perfect sense.
However, there are different types of buyers, and each will view the purchase of your business through their unique lens or perspective. Their view comes from their personal experiences, financial situation, and ultimately, their goal if they decide to buy your business.
A business buyer who wants to buy themselves a job has a different perspective from a buyer who wants to acquire your business as a competitor. There is another type of buyer called a strategic buyer. A strategic buyer differs from the previous two in that their motivation to acquire your business is to complement or provide synergies with their existing business operations.
Strategic buyers look for specific business and financial criteria regarding whether to buy your business or not. The greater the number of items that match the list below, the stronger the value it creates for the strategic buyer, and the greater will be their motivation.
Selling your business to a strategic buyer can be a complex and time-consuming process. To better understand the factors that influence their decision to make an acquisition, we have identified ten key factors in more detail.
Strategic Acquisition Definition
A strategic acquisition is the purchase of one company by another company to gain a competitive advantage in the market.
Typically, a strategic acquisition is made by a larger company to obtain access to new products, markets, or technologies. For example, when Google acquired YouTube in 2006, it gained access to a popular online video platform, enabling it to better compete with rivals such as Microsoft and Yahoo.
-
Diversity of customers
Suppose a business is booming, but all its contracts are with a government agency or a single major customer, along with a few smaller ones. In that case, the business is at risk of financial instability.
The ideal scenario for a business owner is to have a diverse customer base with no single customer generating more than 5% of the total revenue, and a large number of customers.
If the concentration is too high, it can threaten the viability of the business. A simple way to diversify the customer base is for the business to acquire another business and gain access to its existing customer base.
-
Recurring revenue
Just as a diverse customer base is beneficial, so too is having different revenue streams for various products and services.
Suppose sales come from items such as contracts from monthly or annual maintenance, monthly or annual licensing fees, recurring retainer fees, technology licenses, etc.. In that case, these are great value drivers compared to one-off sales, time-and-materials revenue, or other non-recurring revenue streams.
-
Diversity of products or services
Just as there is a risk of having a lack of diversity when a single customer generates too much annual revenue, a business with a small portfolio of quality products or services puts itself at risk if the market changes due to a new and better solution.
It also allows the customers to push for a better deal, or they will move their business elsewhere.
-
Depth of management
If a business is booming, its main reason is the owner and the executive management team.
An excellent way for a business to grow quickly is to acquire a successful competitor and leverage the skills and energy of a smaller, yet successful, business.
A successful business with a strong management team should implement the right incentives for employees, along with employment contracts, non-compete agreements (if possible and meaningful), and adequate stock or equity incentive plans.
If the business is in the process of being sold, this can be a good strategy to ensure the right employees don’t feel their position may be at risk under a new owner.
-
Legally protected products and/or services
The business world is changing rapidly. If a strategic buyer identifies a new technology, a stronger business approach, synergies, or strengths, bringing the two companies together can create a competitive advantage; this is a significant incentive to finalize a deal.
As the owner of your business, continue to seek innovation, advantages, and new ways to do things faster, cheaper, and better than your competition, and this will add significant value to your business.
Consult with an attorney who specializes in intellectual property to determine if it should be legally protected.
-
Buying a business as a path to growth
We often complain about excessive government regulation, but it does create barriers to entry. It also provides a reason for a strategic buyer to buy your business, as some items are in short supply.
For example, a long-term lease on a special location, a special permit, zoning restrictions, a restricted or limited number of licenses (such as for liquor or firearms), or other regulatory approvals may be required.
Entering specific markets without the necessary government regulation permit or license can make it extremely difficult to do so. If a business wants to grow, it can make itself an attractive acquisition by offering something another business needs.
-
Strong financial statements
The depth and quality of the financial statements and supporting reports provide insight into the business, including its performance. This is important because they reveal the owner’s attitude and how they utilize the data generated from the reports.
Without exception, a buyer will want one of their professionals to check the integrity of the data. If the owner has taken the step to have a reputable CPA conduct a Review or Audit of their financial statements, it casts the business in an incredibly positive light. It shows what the business stands for, and at the same time, considerably lowers the buyer’s perception of risk.
In addition to having an outside CPA firm, a reasonable attorney also helps present the business in a positive light. If the owner of a business has a strong team of outside professionals, it reduces risk. It allows for quick decisions to be made, which can be a great asset to the owner if they can quickly exit the business and receive the maximum value.
-
Acquiring a new sales pipeline
If you watch the business news, it’s a constant that a larger company invariably wants to buy a smaller company.
The reasons are many, but one compelling reason is that the acquirer can acquire the acquiree and, in doing so, tap into both their product and sales pipeline.
Smaller companies tend to be more agile in identifying and seizing new opportunities than larger, slower-moving companies.
The new CEO of Microsoft, Satya Nadella, made that announcement in July 2014 to all its employees, including the departure of about 18,000 employees.
-
Acquiring intellectual property
It takes work to publish white papers, write books, speak at industry events, write articles, maintain relationships with the media, and utilize positive PR to stay top of mind. As they say, there is only one thing worse than being talked about, and that’s not being talked about.
Being renowned in your industry as a voice of authority or someone worth listening to provides your business with cachet and allows it to be seen in the most positive light possible, which brings more business and another reason for your business to be acquired.
-
Declining, stagnant, or growing
What is the stage of the business cycle? Is it declining, stagnant, or growing?
The owner of a business goes through many stages, and the economy has a significant influence. When they are younger, they have plenty of energy, enthusiasm, and a higher tolerance for risk-taking. As they get older, these same attributes begin to decline.
If the economy is strong, there is an incentive to work harder as there are rewards. If the owner has an explicit and written growth plan that maps out the direction of the company for the next two to ten years, this document can add value.
A written growth plan can include additional markets to target, new or additional products or services, opportunities to improve both selling and buying margins, changes to existing products or services and the opportunities they bring, and more.
The bottom line is crucial to all business owners and potential business buyers. However, when a company wants to make an acquisition, they are looking for opportunities and data to support that opportunity. If you run your business as if it’s always for sale, it brings disciplines and opportunities that stand out and will result in a purchase price premium, if selling is what you want to do.
Are you considering selling your business and taking on your next challenge? Would you like to know the value of your business? For more information, please visit our Business Valuation page.
Selling your business to a strategic buyer doesn’t have to be a complicated process.
By understanding these ten key factors – including knowing what strategic buyers are looking for, determining their willingness to pay, identifying buyers in the right places, and negotiating the best price – you can increase your chances of finding the right strategic buyer and securing the best price for your business.
They can also help attract a diverse range of buyers, increasing your chances of selling your business on your terms.
Are you ready to sell, or do you need some help deciding? Contact us today at this toll-free number (844) 414-9700 or simply email us at support@rogersonbusinessservices.com
Rogerson Business Services: Why Hire Their Expertise
Work with a qualified business broker during your sell-side process and strategic due diligence, you can feel confident that all aspects of selling your business in California will be handled with care and expertise.
With their help, you will be able to sell your business at top dollar. Here are some of the valuation tactics that Rogerson Business Services, expert brokers in California, can help you achieve your goal:
- How To Increase Company Valuation? 4 Value Drivers You Need To Know
- What is Quality of Earnings Analysis: Sell a Business Due Diligence in California
- Adjusted Financial Statements When Selling a Business in California
- SDE Adjustments To Make Before Selling a Business in California
- How Do I Calculate The Value Of My Business To Sell In California
- What is My Business Worth? | Valuing and Selling Your Business
- How Much is a Business Worth to Sell? | Determine Business Worth
- Income Approach Valuation | Finding Business Worth Easily
- How To Value A Business Quickly: Best Business Valuation Formula
- Seller’s Discretionary Earnings (SDE) Valuation | Selling a Business in California
- Financial Due Diligence When Selling a Business
Do you have any questions about valuing an IT services company? Leave a comment below, and we’ll be happy to help!
If you are considering valuing and selling your business in California, working with a broker is a great option. A broker can help you get the best price for your business by doing things like valuing your business correctly, finding the right buyer, and negotiating the best terms. If you are ready to sell your business, contact Rogerson Business Services today.
Andrew Rogerson is a certified business broker based in Sacramento, California, who services the whole State. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com.
Further reading
Accurate Financial Statements When Selling a California Businesss
The Uncertainty Principle when Selling or Buying a California Business