Don’t wait until you want to sell your business to find out you could have done more to make it more attractive to buyers.
Tim McDaniel, CPA/ABV, ASA, CBA, principal at Rea & Associates, says there are eight key factors that determine the salability of a company. Knowing how your business stacks up in these areas provides benefits even if you’re not thinking about selling.
“The more you make your business sellable, the more fun it is. Your business is sellable when it’s less reliant on you, there’s less risk, more cash flow and higher growth. You might work on all of those things and decide it’s so much fun you wouldn’t want to sell,” says McDaniel.
Smart Business spoke with McDaniel about salability factors and what buyers are looking for when considering an acquisition.
What are the key factors that determine whether a business is sellable?
There are eight main buyer considerations:
- Financial performance. The better and more consistent recent performance is, the more assurance it gives a buyer.
- Growth potential. Whereas financial performance is more about history, growth potential looks at the future. A future income stream with a lot of potential is very attractive. There are times when past performance might not have been great, but there appears to be a growth opportunity on the horizon.
- Switzerland structure. The business does not overly depend on any single customer, employee or supplier — they remain neutral if there is a loss in any of those areas. For example, one business owner had 80 percent of its business with one customer and went bankrupt when it lost that business. Things like that make the business less sellable.
- Valuation teeter-totter. Essentially, this is about having up-to-date equipment. If your equipment is old, you either have to invest in new equipment or a buyer will pay you less because they’ll have to buy new.
- Hierarchy of reoccurring revenue. Alarm systems sell for a premium because they have monthly reoccurring business, which lowers the risk. Reoccurring income is very important to buyers, and it’s particularly attractive if it’s under contract.
- Monopoly control. Future cash flow is important, and the higher the barriers to entry, the harder it is for a competitor to take away market share. Few people can start a business to compete with the iPhone. However, if you want to compete against a painter, you just have to hire people who are skilled at it and advertise.
- Customer satisfaction. High customer turnover will create ill will in the marketplace at some point and certainly makes a business more difficult to sell.
- Hub and spoke. This addresses how well the business can survive without you. Many small businesses are dependent on one person and will fall apart the day they leave. That makes the business less valuable and difficult to sell. A buyer might have some of the purchase price based on you staying, and have you sign an employment contract. That’s why it’s important to start building a good management team and relying on other people.
How can a business improve its salability?
Not all businesses excel in each of the eight areas above. However, an owner needs to work toward improving those areas where it is weak in order to make the company more sellable. Start by identifying what drivers need attention, and then develop specific action plans to positively impact them. You will watch the value of your business increase dramatically. It’s not something you want to start working on two weeks before you sell. It’s a process that takes time and focus.
Often, business owners are too busy running day-to-day operations to sit back and consider their business’ value. Yet, there is benefit in looking at the business through the eyes of someone who might be interested in buying it.
Tim McDaniel, CPA/ABV, ASA, CBA, is a Principal at Rea & Associates. Reach him at (614) 923-6532 or [email protected].
Determine your business’ sellability score at www.reacpa.com/my-sellability-score.
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