Building a business takes hard work and skill, so what makes your business more attractive to a buyer than another, ie ‘fit for sale’? Typically a business that is fit for sale will be a company with less risk associated with its future potential, remember buyers may be looking at several potential acquisitions simultaneously. The one they choose may not be the one with the greatest growth potential and exponential projected earnings growth, but the opportunity with the less risk.
As a rule of thumb lower risk companies command higher valuations than higher risk companies – it just makes sense. If you are a buyer acquiring a privately held company, you inherently will also be acquiring a certain level of risk. The opportunities with lower risk will generally command a better valuation because the return on investment is considered to be safer than it is for a more risky investment opportunity.
So to ensure your business is fit for sale at the right price the 3 areas to look at are analysed below.
How well documented are the company’s operations, and how up to date is the company’s technology?
What most small business owners hate is paperwork. However, during the due diligence, buyers will ask you to provide written evidence that the company’s continuity can be maintained even if management changes. The easiest way to prove this is to create procedural manuals that clearly outline how the company functions.
Another good idea is to creating detailed job descriptions that outline the key role employees play and clearly demonstrates to a business buyer that your company’s success is not due to luck but is driven by a well organised team.
On top of that, make sure that your technology is up to date. Even if you operate in a “low tech” industry, the reality today is that every company uses some level of technology in its operations. At a minimum make sure that your accounting system is robust and can handle the demands of a buyer during due diligence.
What is the company’s exposure to market shifts?
A trap that many business owners fall into is commonly called “customer concentration.” It is amazing how many business owners we meet are quite proud of the fact that Customer A represents 50% of the revenue of the company and that percentage is steadily growing. Although having a strong relationship with a blue chip customer does indicate a level of customer service that many would envy, it does raise the level of risk for a buyer. Simply put, if Customer A decides not to do business with the new owner, he or she is suddenly in a position of being forced to replace nearly half of the company’s revenue overnight.
Most business owners will claim that would never happen because the relationship is mutually beneficial and new owners need not worry about losing the business. However, even if the relationship is contractual, buyers will view the business as risky. Do not become complacent and let your business become dependent on a single source of significant revenue. This issue cannot be over stressed – always look for new business and new opportunities.
Does the company have a developed management team?
Finally, perhaps the area that buyers will focus the most attention on is how dependant the business is on the current owner. Unless you are planning to stay with the company indefinitely post-acquisition, it is vital for you to hire and groom managers for your business. And once you have hired them you then need to take the next step and do something that most entrepreneurs find very hard – delegate key decisions to them.
Buyers grow very concerned when they encounter a business that relies solely on the founding entrepreneur to make all decisions. Successful companies that are fit for sale are led by a team of key individuals, not just the founder. To reduce perceived risk even further, it is usually best if the person(s) you identify to groom are not family members.
These are just three common areas where we see buyers looking closely at the level of risk associated with an organisation. There are certainly others that we encounter regularly during due diligence. You need to examine your company as if you were a buyer – this is very difficult to achieve if you are running your business day to day. It is an ideal opportunity to get some independent and objective advice, call 07720 397040 or alternatively contact Phil via this form.