Selling a business to a strategic buyer
How to sell a business to a strategic buyer. If you are thinking of selling your business you probably have a simple outlook. All I need is one buyer and if they like my business, I like them and they have the money and vision in place to buy my business, let’s do a deal. That makes perfect sense.
However, there are different types of buyers and each of them will look at buying your business through their lens or view of the world. Their view obviously comes from their own personal experiences, their financial situation and ultimately their goal if they decide to buy your business.
A business buyer that wants to buy themselves a job has a different view to a buyer that wants to buy your business that is a competitor. There is another type of buyer called a strategic buyer and their view is different to the previous two as their motivation to buy your business is to make the acquisition so it complements or provides synergies with their business and what they currently do.
Here are ten items a strategic buyer looks for as part of their decision making process 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.
1. Diversity of customers
If a business is successful but all their contracts are with a government agency or one main customer and a few smaller customers the business is at risk. The ideal scenario for a business owner is to have a cross section of customers with no one customer generating more than 5% of total revenue and there to be 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 buy another business and gain access to their mix of customers.
2. Recurring revenue
Just like a diverse customer base is good, so too is having different forms of revenue for different types of products and services. If sales come from items such as contracts from monthly or annual maintenance, monthly or annual licensing fees, recurring retainer fees, technology licenses, etc. these are great value drivers compared to one off sales, time and materials revenue, or other non-recurring revenue streams.
3. Diversity of products or services
Just like there is risk in having a lack of diversity in having one customer generate too much annual revenue, a business that has a small portfolio of quality products or services puts the business 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.
4. Depth of management
If a business is successful its main reason is the owner and the executive management team. A great way for a business to grow and grow quickly is to acquire a successful competitor and bring the skills and energy of a smaller but successful business. A successful business with a strong management team should put the right incentives in place for the employees as well as employment contracts, non-compete agreements if possible and meaningful, and the right stock or equity incentive plans. If the business is in the process of being sold, this can be a good strategy so the right employees don’t feel their position may go away under a new owner.
5. Legally protected products and/or services
The business world is changing and changing fast. If a strategic buyer sees you have a new technology, a more advanced way of doing business, synergies or strengths are able to increase by bringing the two companies together that creates a competitive advantage it’s obviously a huge incentive to get a deal done. As the owner of your business, continue to look for innovation, advantages, new ways of doing faster, cheaper and better than your competition and this will add great value to your business. Talk to an attorney that knows intellectual property to see if it should be legally protected.
6. Buying a business as a path to growth
We complain about too much 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 or a special permit, zoning restriction, restricted or limited number of licenses, for example, liquor or firearms or other regulatory approvals. Getting into some markets without the right government regulation permit or license can make it extremely difficult to do to business and if a company wants to grow, can make it an attractive acquisition if another business has something they want and need.
7. Strong financial statements
The depth and quality of the financial statements and the supporting reports provide a statement about the business, obviously how well its performing and probably most important of all, the attitude of the owner and how they use the data that comes from these reports. Without exception, a buyer will want one of their professionals to check the integrity of the data. If the owner has taken that step by having their financial statements reviewed or audited by a reputable CPA firm, it casts the business in an incredibly positive light, what the business stands for and at the same time, considerably lowering the buyer’s perception of risk.
In addition to having an outside CPA firm, a good 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 the risk and allows quicker decisions to be made which can be a great asset to the owner if they can and find they are able to quickly exit the business and receive the maximum value.
8. 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 is able to buy the acquiree and in so doing, tap into both their product and sales pipeline. Smaller companies tend to be more agile as they look for and see new opportunities than the larger and slower moving larger company. The new CEO of Microsoft, Satya Nadella made that announcement in July 2014 to all its employees and includes the departure of about 18,000 employees.
9. Acquiring intellectual property
It takes work publishing white papers, writing books, speaking at industry events, writing articles, having relationships with the media and using 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 its own cache and allows your business to be seen in the most positive light possible; which brings more business and another reason for your business to be acquired.
10. Declining, stagnant or growing
What is the stage of the business cycle? Is it declining, stagnant or growing?
The owner of a business moves through many stages and a lot are influenced by the economy. When younger they have plenty of energy, enthusiasm and hunger for risk taking. As they get older these same attributes begin to decline. If the economy is strong there is incentive to work harder as there are rewards. If the owner has a clear and written growth plan that maps out the direction of the company for the next two to ten years, this document can add value to the purchase price of the business as the buyer sees and understand additional opportunities they either didn’t consider or didn’t know were available.
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 important to all business owners and any business buyer. 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 clearly stand out and will result in a purchase price premium; if selling is what you want to do.
Are you thinking about selling your business and move to your next challenge? 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.