In order to find the optimal buyer, you need to develop and build your business to sell to a buyer who wants a sustainable business, not a job. Take the time to improve your business’s efficiency and increase its growth if you want to maximize its value and achieve your desired sales price.
This means it’s time to plan your exit strategy now. You should always be thinking about the future and the day you plan to sell your business for more than it is worth.
Identify the type of buyer who would find your business desirable, and then build your business to appeal to what that person wants for a good investment. Reverse engineer these factors in order to obtain the ultimate selling value for your business before assessing your current situation.
Then, plan your endgame and your sales goal.
Important Buyer Factors to Consider
Should you sell now or focus on improving your business to fulfill what buyers are looking for in today’s marketplace? When you’re not in a rush to offload your business, this extends the time to sell.
What are buyers looking for? What makes a business attractive to them?
Whether you struggle with operations, employees, inventory management, staff management, or any other business problem, you can determine the strategy needed to put your business on the right track by using the Six Ps Method to make it more appealing to buyers. The six Ps serve as a blueprint for optimizing and building your business.
How You Can Match the Criteria of the Five Types of Buyers
There are several types of business buyers. Each type looks at different aspects of a business and has their own purchasing strategy. Knowing the different types of business buyers is crucial for building your business to sell and match their criteria.
First-time buyers sometimes lack knowledge of the intricate details of buying a business. They may even look to use their retirement funds to make a tax-free down payment. Often, they want to earn the same amount of income (or more) as in their current job. Plus, they relish the idea of being their own boss. However, they usually don’t know how to evaluate whether a business is operating on all six cylinders (or the six Ps: people, product, process, proprietary, patrons, and profit).
First-time buyers usually prefer to work with a mergers & acquisitions (M&A) advisor or business broker. This provides the peace of mind that their interests are being protected, as well as someone to help them through the buying process.
With their funds on the line, first-time buyers won’t pull the trigger unless they feel confident that they’re making a good decision. They’re often interested in profitable, “safe” businesses that show a good income for the owners.
Sophisticated buyers can tell when a business is making money and when a seller is trying to pull the wool over their eyes. They’re experienced, and usually have bought, started, and run their own businesses. They’re quick to pull the trigger because they know what they want. Sophisticated buyers may look at a particular business because they enjoy their product or service or would like to create an investment in a specific industry.
Competitors and Strategic Buyers
Competitors and strategic buyers will buy synergies in which to add additional profit centers, create congruent revenue streams, or solve a problem. These buyers know exactly what they are looking for. Some of them buy 70 to 80 percent of a business, leaving 20 to 30 percent of the ownership with the previous owner to keep him or her there. Typically, they buy businesses in the same or a similar industry as the one they are already in.
Competitors and strategic buyers evaluate businesses differently than other interested parties do. They look at how they can streamline operations to decrease overhead, take advantage of the economy of scale, and better fulfill customer demands. Sometimes, they acquire businesses to roll into their current portfolio simply to grow and eventually sell their entire company.
Private Equity Buyers
Private equity buyers look at quite a few deals before they find one that matches their criteria, and they usually won’t buy a business that doesn’t have a solid management team in place. Some are opportunistic investors who review many deals looking for businesses that need recapitalization, leveraged build-ups, management buyouts, or innovation. They often have funding in place or disposable income, so they move fast. This type of buyer has diverse criteria, which means meeting their requirements requires a bit of luck (and a few well-functioning Ps).
Turnaround specialists search for businesses that are overlooked, undervalued, or doing poorly. Their goal is to fix what’s wrong and transform them into profit-generating businesses. They often then sell the renovated company. If you don’t have the desire to grow your company and reach the highest price for your business, you may want to consider a turnaround specialist buyer.
What Kinds of Questions Buyers Will Ask You
All buyers will ask basic questions such as how long you’ve owned the business, whether you have partners, a board of directors, or stockholders — and whether everyone is on board with selling.
They’ll also ask you if you own real estate. Buyers will want to know whether you’re selling your business with or without the real estate. Is your business location-dependent?
Here are a few sample questions for reference:
Industry: Are you in a competitive industry or a niche market? Is your industry fading or on the cutting edge?
Customer Base: What is your customer retention rate? What’s the geographic and demographic makeup of your customer base? Do you have contracts in place?
Products: What is your product mix? Is your business seasonal or annual?
Profit Centers: How many revenue streams do you have?
Proprietary: Do you have any trade secrets, trademarks, patents, or other intellectual property? Is your business branded?
Financial: How much debt do you hold? What’s your collection rate?
Think Like a Buyer
In some ways, buying a business is similar to buying real estate. When you walk in, you want to experience a certain “look and feel.”
Your buyers may be interested in how your business looks physically. Is it cluttered? Does your workspace need a facelift? They’ll ask questions about your furniture, fixtures, and equipment (FF&E), such as: How old is your FF&E? Is everything in good condition? Do you have an appraisal on your FF&E? Do you owe any money on it?
Turnaround buyers may be happy that your business looks decrepit and all the FF&E needs to be replaced. Upgrading everything would be part of their strategy to increase the value of the business and sell it at a profit after they’ve optimized the six Ps.
However, first-time buyers who see outdated equipment in a rundown workspace might walk away. First-time buyers often want a business they can walk right into and feel comfortable without making any major new investments for a while.
Why Are You Selling?
Buyers will want to know why you are selling the business. This sounds harsh, but some buyers perk up when they hear about a business owner going through a nasty divorce or health problems; they know they might be able to get a deal because of your distress. They’ll also want to know whether you’re burned out, simply want to move to another area, or try a new career.
You’ll need to clearly explain to a buyer why you want to sell. If you want to sell right now, but you haven’t built your business to achieve an optimum selling price, you may only be able to market your company to turnaround buyers.
When you’re ready to sell, call your M&A advisor to assess your selling strategy and vet your business for the appropriate buyers. They help buyers locate businesses that meet their needs and buying criteria.
One of them will be yours.