Business owners who are thinking of selling their business often ask us, “What are buyers looking for?” This is a great question, because the more attractive a seller can make their business to buyers, the more likely it is to sell. Statistically-speaking, only 1 in 4 businesses listed for sale actually end up selling. So, what is so special about the 25% that do sell? Here we will discuss exactly what we have learned from buyers about what they are looking for, so that any potential sellers wanting to prepare their businesses for sale can plan accordingly.
A Good Return on Investment
The number one thing buyers are looking for in a business that they will purchase is a good return on their investment. The cash-flow after business expenses or owner benefit needs to be sufficient to cover the new owner’s desired salary, which will vary from owner to owner, based on their personal situations. Then it also needs to pay for any debt coverage, if they should take out a loan to purchase the business, and then it needs to be able to pay them back their initial cash down payment or cash investment. Most buyers look for an ROI (Return On Investment) of 2-3 years. That would be considered a good ROI. An ROI of 4-5 years would make it an OK investment for most buyers, but any ROI over 5 years would be considered a questionable investment and would make the business more difficult to sell.
At Green & Co. we include a Buyer ROI analysis with every business valuation that we perform. That way, our sellers can see what the ROI would be, based on the proposed list price of their business. When pricing a business for sale, buyer ROI should definitely be considered, as it is one of the main factors that a buyer will look at.
Clean Financial Records
Businesses that have clean, solid financial records that they can share with potential buyers will make the business much more attractive to buyers. Tax Returns are the preferred method of showing the business’s financials, but sometimes Profit and Loss Statements will suffice for some buyers in certain situations.
As with most small businesses, there are many personal expenses accounted for in the financials. Because this is so common, your business broker will perform a financial recast to add back in those provable personal expenses. Some of those add-backs are automatic, like depreciation, amortization, and interest, but a buyer will question excessive add-backs of personal expenses, so the least amount as possible in a business’s Tax returns the better. If you are preparing your business for sale, try as much as possible to limit running any personal expenses through the business for the 3 years leading up to putting your business on the market. Also, unreported cash income can scare buyers, since it’s often not provable, so you might want to start accounting for all of your income, including cash, leading up to the sale of your business, because no buyer is going “take your word for it.” For any questions regarding your financials or Tax Returns, always consult with your CPA for professional advice.
Buyers look for businesses that come with highly trained employees, and more often than not, buyers would prefer to purchase a business that has a manager or key employee in place, who can successfully run the business operations. This leads to a smoother transition between ownership, and it ensures consistency for the other employees, as well as the customers.
Businesses that have a manager and a specific employee structure in place are much more likely to be attractive to buyers, and it also opens up more investor-type buyers who are looking for a business that can be run by an absentee owner.
Documented Processes and Procedures
Part of why a buyer would choose to purchase an existing business over starting from scratch is a business’s established processes and procedures. The value to a buyer is having those processes and procedures documented by the seller, so that they can pick up the reigns and keep the business going long after the previous owner has moved on. This is an easy activity for a seller to do, to ensure they add value to the purchase of their business. Buyers often find out there is nothing documented (processes and procedures, training, customer lists, etc) during the Due Diligence process, and unfortunately pull out of the deal because without those things, they struggle to see exactly what they are purchasing. So, make it easy for a buyer to see value in the business by making sure all aspects of the business are documented and recorded in a way that can easily be passed from one owner to the next.
Confidence that the Business Will Continue to Thrive
There is an old adage in the business sales industry that “a buyer pays for the past but buys the business for the future potential.” A business for sale is traditionally valued based on its past financial performance. A buyer pays the price they do because of what the business has earned in the past, and after a substantial investment like that, they want to have confidence that the business will continue to earn the same amount under new ownership. Without a doubt, a change in ownership does create some customer turnover; however, having things like written contracts in place or guaranteed income sweetens the pot for potential buyers. Being able to demonstrate something like this inspires buyer confidence and is the cherry on top to hopefully seal the deal. Of course, not all business types and industries operate like this, so you will just want to make sure that all of the other aspects above are strong.
Start Preparing Now
The sooner a business owner starts preparing their business for sale the better…even if you are several years away from listing it for sale, the timing to get in touch with an awesome Florida business broker is now. We can help you get all your ducks in a row to make sure that, not only do you get top dollar for your business, but that it is irresistibly attractive to buyers.