Business owners often focus on the next big milestone for their business. They believe that they things they value are the same things a buyer will look for. Getting that first million of turnover, surviving the first 5 years in business, increasing your personal income year on year – these are great goals if you are working in your business. But what if you are thinking of selling?
Here’s the bad news – buyers don’t care. They look at your business in a very different way. It’s how a buyer views a business that sets the value, not how you see your business. Selling successfully demands a different perspective.
Looking at your business through the lens of a buyer or investor allows you to make plans for your retirement or the eventual exit from your business. Where do you start? How “exitable” is your business?
What’s the Value of Your Business to a Buyer / Investor?
If your focus is entirely on profitability then you could be missing out on a higher ticket price for your business. The value of your business is much more than just this year’s profits. A profitable business definitely sells much more easily than one breaking even.
A buyer will also look at the risks in your business and how they are going to get a return on their investment. They aren’t interested in YOUR VIEW of the potential in the business, they assess that for themselves. If you know how they value that, you’ll be able to prepare your business to present the opportunities.
Typically, as a basic calculation, a business is valued based PROFIT x MULTIPLE. The multiple represents a mix of the industry sector, your business performance and the risk profile of the investment. You might feel it’s worth £X millions because you’ve invested your life into it – a buyer doesn’t factor those issues into their valuation at all.
No matter what the valuation calculation is on paper, a business is like a house, it will only sell if someone is in a position to buy it. The factors taken into account are always more than the money value.
Don’t get me wrong the numbers are important. Buyers want to see evidence of sustainability of profits and cash. Your business ability to generate cash is evidence of a buyers ability to get their investment back – or pay debt if they are using borrowings to fund part of the acquisition.
When you think about your exit strategy it will no doubt change the way you think about your business. Having the end in mind means your decision making should always have a mind on the impact to the valuation and attractiveness to a buyer.
Who is Your Buyer?
In many cases the seller knows who potential buyers are but haven’t thought about it yet. Really good corporate brokers know who’s in the market for your business – who’s been buying other businesses or looking for acquisitions – that’s the way they make money.
Once you have a clear idea of who your buyer is, you need to understand what their needs are and present your company in the most attractive way. Making your business a compelling proposition is the same process as making your products or services a ‘no-brainer’ buy for your customers. It takes the same effort and focus.
What are the Risks in Your Business?
Buyers look beyond the numbers. What risks are they taking? They want to see how they get a return on their investment . What that might get in the way of that return?
They look at the overall industry – is it growing, declining, at risk of disruption? What are the competitors doing? How secure are suppliers? Are you at the premium end of the market or the budget end?
Benchmarking yourself against the industry gives you the same insight a buyer is looking at. It is an essential element of reducing the risks in your business and knowing what to focus on to prepare for sale.
Buyers look very carefully at your numbers – they dig deep into them during the due diligence process (the part of the sale process where the buyer gets to see what they are really buying). They will generally look at the last 3 years numbers in excruciating detail – sometimes 5 years. If you already know what’s in this analysis you are prepared to answer questions.
This is one of the areas where most sales fail. The buyer finds anomalies in the numbers and sees more risk than they are prepared to take or pay for. Having insight before you go to market gives you a head start. Spending 3 years preparing your numbers to present the best view of your business is a wise use of time and avoids wasted time and money later.
The sale process costs money, time and energy from both sides – as the seller it takes your attention from the business which can be damaging if the sale fails. It’s an emotional rollercoaster that is better ridden with more certainty. Certainty comes from preparation and planning.
Summary
Forewarned is forearmed – give your business the best chance of selling by being prepared. Take a look at your business from the perspective of a buyer and make the necessary adjustments to improve your attractiveness.
Here at Succession Plus UK, we look at your business through the lens of a buyer or investor. We prepare a detailed and in-depth Stage 1 Insights report for your business. This shows you what your business is worth today and benchmark it against others in your industry. You’ll see how to improve the value without having to increase your revenue or turnover.
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