Criteria for the “Perfect Business” - O'Keeffe and O'Malley

Criteria for the “Perfect Business”

May 19, 2016

Each week, we hear from at least fifty buyers who describe their preferred industry or the type of business they would like to buy. To help both buyers and sellers understand current demands, we summarize and update these monthly requests on our website’s list of Top 25 Most Desirable Businesses. When we speak with these potential buyers, we also hear many other specific comments as to what buyers are looking for in a business. Following are commonly mentioned, compelling points that many buyers look for when they acquire a business.

  • Positive sales and earnings growth for 3 to 5 years. If a business does have a negative trend that can’t easily be explained or with assurances that it won’t happen again in the future, it’s a red flag for buyers.
  • Repeat and recurring sales. Repetitive sales from client's month-after-month or year-after-year are highly desired and can bring a premium price. A business with recurring sales is much more desirable than a business that must constantly generate new sales just to maintain sales trends, let alone grow. Many technology companies and insurance companies would fall in this category.
  • Non-commoditized products or services. Most buyers shy away from products or services that are so competitive in the marketplace that competitors are constantly bidding lower and lower for the sale.
  • Non-capital intensive businesses. Businesses that have to spend a lot of money on equipment, vehicles and other fixed assets on a regular basis are a drain on cash flow. If cash flow is low, most buyers won’t pay as much for the company, or may avoid them completely.
  • Businesses that are impacted by the Amazon effect. Amazon serves many businesses well, but it has also hurt many businesses. It has given many smaller companies the opportunity to sell products online, however, some retailers and other distributors have seen negative effects. Companies that haven’t moved to e-commerce have suffered, and companies who use Amazon for their e-commerce pay Amazon up to 12% of sales. Furthermore, if an industry or product is generating a lot of sales for Amazon, Amazon may produce a competitive product and be able to price it lower.
  • Businesses that aren’t heavily impacted by economy. Large swings of our economy or stock market can negatively affect certain businesses. Certain market sectors tied to oil and gas, construction and real estate usually have severe downturns every 7 to 10 years and many buyers avoid these businesses.
  • Businesses not impacted heavily by technological changes. Technology can be a godsend but it can also wreak havoc if the industry of the business is going through a major change, as it can be very expensive to keep up with technology in some sectors.
  • Lower labor costs and size of staff.  Labor costs are often the highest expense component of businesses expenses. Requirements to provide health insurance for 50 or more employees and the rise of minimum wage have moved some buyers to look for companies that have smaller staffs and lower wages.
  • Strong management team. If there is not a strong management team left to run the company after the owner has left, most investment groups will pass on the transaction, as they don’t have management on the sideline to run the business. It’s not as critical for strategic buyers, but it still can be a concern, as most will want trained, knowledgeable and experienced people.
  • Businesses that aren’t dependent on the owner or any one employee. When the business is dependent on one person, buyers worry about the success of the company if something happens to that key person, or that the person may not transfer their knowledge to someone else. Businesses simply aren’t as valuable when the business is dependent on one person.
  • Gross profit margin. Net income margins in excess of 10% as a percentage of sales are desired, and margins approaching 20% will bring even more interest. Buyers also like businesses that will have a gross profit margin (sales less cost of goods sold) that is 50% or higher.
  • Patented products. If you have ever watched “Shark Tank,” you know that the investors are very interested in a business that has a product that is patent protected and has opportunities to expand selling the product.
  • Low concentration of customers and vendors. Having a good customer mix with no one customer representing no more than 10% of your total revenues is very attractive. Having alternative or multiple vendors is appealing, as well.
  • Product or service diversification. A company with just one product line or service is at risk. Multiple lines that are evenly distributed is much more appealing.
  • Branded company name and products. Well-known companies and products require less marketing and advertising, so buyers can expand the product lines easier and grow more quickly.
  • Businesses that are in the top three of their competitive ranking. Even when investment groups are not specific about the business they are looking for, they don’t want to be at the bottom sales ranking of the industry. Those that are in the top three in sales volume in any industry are in higher demand.
  • High costs to entry. Businesses that are expensive to get into may not have as much competition; therefore, prices can be more easily increased, leading to higher profits for a buyer.
  • Businesses that can grow nationally and internationally. Most buyers want to expand and grow a business, not just maintain status quo. Buyers will pay more for a company with a lot of rapid growth opportunity.
  • Accurate accrual financials. Buyers feel they can’t depend on messy financials for good information, and may lower their value of the business. Even worse, they may pass on the opportunity, as it may cause them to question the way the business is being run. Audited financials are beneficial.
  • Strong value proposition. Businesses or services that are perceived to be strong in the eyes of the customers instill confidence that clients will be there for the long-term.
  • A great culture. In a strategic acquisition, the buyer wants the acquired company to fit well with their existing culture. Buyers are acquiring talent, and if it’s not in-sync, they will walk away.

Finding all of the above criteria in one business is nearly impossible. However, if your business has most of the above attributes, you could realize a much higher value versus other businesses in your industry.


Please call us at 913.648-0185 with questions about any of the above attributes and how we might help you get the highest value for your company.