Selling the “Perfect Business”

Of course, there is no such thing as a perfect business, but there are things sellers can do to put their companies in the best possible position for a sale. Our years of experience selling businesses have taught us what buyers, investors and banks look for when evaluating a potential acquisition. And although it’s nearly impossible for a business to have every single positive attribute listed below, having many of them will command a higher price and better terms when the business is sold.

• High Profit Margins – Net income margins in excess of 10% of sales are desired. Margins approaching 20% will bring even more interest. Buyers prefer businesses that have a gross profit margin (sales less cost of goods sold) of 50% or higher.
• Consistent Growth – A consistent, upward trend in sales and profits shows potential buyers the business has been well-run and that they can avoid the ups and downs they may fear. Ideally, businesses should show positive sales and earnings growth for three to five years. The higher the growth rate, the higher the value. Any negative trend that can’t be easily explained with assurances that it won’t recur is a red flag for buyers.
• Recurring Revenue – A business with recurring sales is much more desirable than a business that must constantly generate new sales. When buyers know there is some recurring revenue, they minimize the risk associated with a transition and are more likely to pay a premium price.
• Diversified Customer Base – A large, loyal customer base will interest buyers. A customer mix with no single customer representing more than 10% of total revenues is very attractive to buyers. Knowing not all the eggs are in one basket is appealing, as it limits risk.
• Long-term Customer Contracts – This is another source of comfort, again, minimizing risk.
• Low Capital Expenditures – Businesses that require significant expenditures on equipment, vehicles and other fixed assets on a regular basis are a drain on cash flow, so buyers may avoid them or offer lower prices. Knowing they won’t have to immediately pump large sums of money into the company will be attractive. If the company does require large capital expenses, the buyer needs to know so there are no surprises in due diligence.
• Lower Labor Costs – Labor costs are often the highest expense component for a business. The cost of health insurance and the rise of the minimum wage have moved some buyers to look for companies with smaller staffs and lower wages.
• Solid Management Team – Experienced managers will provide much-needed continuity after a sale and make the transition seamless for the buyer. Investment groups will require a strong management team that will stay on board after a sale, because they don’t have the resources to run the company.
• Minimal Dependence on Owner – When the business is dependent on one person, whether it’s the owner or another individual, it is not as valuable to buyers and creates the perception that the business will suffer when that person leaves. Having that solid management team in place will demonstrate that the business will not be negatively impacted when the owner departs, even if the transition is gradual.
• Proprietary Products or Services – Anything that gives the company an edge over the competition is a strong selling point to buyers. If there are no proprietary products, owners should be able to articulate their unique selling proposition.
• Patents and Trademarks – These are gold, and add value to the transaction.
• Non-commoditized Products/Services – Most buyers shy away from products or services that are highly competitive and whose competitors are constantly going for the low bid.
• Product/Service Diversification – Multiple product and service lines are much more appealing to a buyer than a single line.
• Economy-proof – Most businesses are affected in some way by the economy, but if a business is highly impacted by large swings of economy (oil and gas, real estate), buyers may avoid them.
• Expansion Opportunities – Most buyers want to expand and grow a business, not just maintain status quo. Documentation of specific growth opportunities and what will be required to achieve them shows buyers the company’s potential.
• Clean and Accurate Financials – Orderly financials, preferably prepared and audited by an outside source will provide credibility about the state of the business.
• Employee Agreements (non-compete, non-solicitation, confidentiality) – These are more risk minimizers that savvy buyers appreciate.
• Efficient, Documented Processes – Show potential buyers that not only has the business been well-run, but also that the transition after a sale will be smooth.
• EBITDA of $1 Million or More – While we have sold many businesses with a lower EBITDA, those above $1 million are more attractive because they present a solid foundation.
• High Cost of Entry – Businesses that are expensive to start or get into typically don’t have as much competition, so prices can be more easily increased, leading to higher profits.

These are some of the most commonly desired qualities that buyers and investors seek. If your business can claim several of these attributes, you could realize a much higher value than other businesses in your industry. Every business is unique in some way, and that uniqueness can be packaged as an additional selling point.  Let us help you position your business so it is ready to sell when you’re ready. For more information or for advice on any aspect of preparing for an exit, contact us at 913.648.0185, visit our website or email [email protected].