Growing Business is More Attractive to a Business Buyer
A common question I get from business owners that are ready to sell is simply “What are the chances of selling my business?”
My answer is simplistic as at the end of the day, different buyers look for different things. However, if there are two things present the business has a good chance of being attractive to buyers. The first is the cash flow and the second is potential.
Very few buyers are willing to pay for a business with no cash flow. If the business is losing money, especially in this economy, a buyer has many to choose from but more importantly, they are looking to buy a business that is making money so the business can support their life style, pay the rent, feed their family, pay the mortgage and have a money left over to service any business debt as well as some padding if things don’t go well when they take over.
The second component is potential. The buyer of a business wants to know that the business they are buying is in an industry that’s not slowing or declining. Would you have an interest to buy a shoe repair shop, a retail book store or an electronic component business that’s being quickly replaced by a new technology?
How do you generate a new source of cash flow or increase the potential of your business?
Here are five suggestions that can build value for your business as quickly as possible so you can sell it if that is what you would like to do.
The first suggestion is to diversify. A strong and attractive business to a buyer has multiple revenue streams and a variety of different customers not only demographically but also geographically. For example, if you have a retail business and generate sales from face to face selling, use your expertise to diversify your business online.
Diversifying also applies to the business owner. Make sure the business has key employees that can step up and keep the business going when the owner needs some downtime; be it planned or unplanned.
2. Create and measure a management team
Most small businesses are an owner operator. When the owner decides it is time to retire and sell the business their potential buyer pool is either a member of the family or the same version of themselves but about 20 years younger. If the owner of the business has an effective management team in place, not only can the owner delegate and get more time to themselves, when they sell the business they have a broader base of potential buyers as it now includes buyers that are investors who don’t want to own and work in the business but buy the business including its management team to complement their portfolio of businesses and bring a return on their investment.
3. Quality financial statements
The place I start when a business owner approaches me to sell their business is by doing a valuation. My reason for starting here is that the quality of the financial statements will either make or break any possible sale of the business or transaction. If the financial statements are not in good shape and it’s doubtful an experienced accountant or book-keeper can make them presentable there is little to no point in me trying to help the seller as buyers will not be interested and it reflects poorly on me as a broker to take a business to market that has a limited chance of selling unless the sale is purely for the hard assets of the business.
4. Understand the bottom line and cash flow
If the quality of the financial statements are important for a business so too is understanding the bottom line and equally the cash flow of the business. Each industry has its own methods of creating a set of financial statements. The methods for a retail store that buys and sells products are different to a manufacturer who buys and assembles raw and/or finished goods to a construction company that has high labor and material. What’s common to all these however, is the owner of the business having a quality set of financial statements that roll up to report the true cash flow of the business. Cash flow is the mother’s milk of a good business. It’s critical the owner understand their financial statementand the cash flow pressure of their business.
5. Grow the business
If cash flow is the mother’s milk of a good business so too is a business that’s growing. Almost without exception, the first thing a buyer wants to see is the last three or five years Profit and Loss statement of the business. With a glance at the top line and bottom line numbers, a buyer can see if the business is growing, static or declining. If the numbers are declining many buyers will simply move on. They have little interest to buy a business in decline as they know with a change of ownership there is a chance in the short term a business will lose customers. For a buyer to therefore try to time or indeed know the bottom has hit the bottom and is now growing is not something they are willing to do. If the business sales are static that can be OK if the owner can provide a reasonable explanation and equally explain what a buyer can do to “turn it around.”
Are you thinking about selling your business? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.