Selling your business: Does it stand out from the crowd?
I recently talked with an owner who wants to sell his business. He’s been successful over the years but has never bought or sold a business before. The company is profitable with about $10 million in annual sales.
During the screening process, I asked him to “walk in the buyer’s shoes” and “grade” his business by considering eight key criteria that investors often use when evaluating a potential acquisition:
• Recurring revenues: Does the business rely on one-time sales or is there a contract or subscription that keeps them coming back? Investors will pay more for companies that can demonstrate a high percentage of repeat business.
• Low CapEx requirements: Are equipment purchases draining cash from the business? Companies that spend a high percentage of their yearly earnings on new trucks or machines are not likely to be valued as highly as less capital intensive businesses.
• Diverse customer base: What percentage of sales comes from the company’s top two or three customers? Investors will be very careful about acquiring a business with “customer concentration.” Ideally, no more than 5 percent of sales will come from a single customer.
• Barriers to entry: Is there something special that keeps competitors at bay? Companies with intellectual property or franchise rights or exclusivity or patents or domain expertise will often draw a favorable response from investors.
• Financial results: Does the company outperform its industry peers? Businesses with profit margins less than industry averages will be penalized by investors for their under performance.
• Growth potential: Is the market growing or does the company have the capacity to offer new products and services? Investors buy for the future – it helps for owners to have expansion possibilities in mind.
• Management team: How dependent is the company on the owner? Skilled managers and key employees who can make decisions are prized by investors – an attribute owner/operators often fail to recognize before attempting to sell.
• Reasonable expectations: Is the company selling for a “reasonable” price? Value remains in the eye of the beholder, especially in the private capital markets. Investors will pay “up” for companies they perceive to involve less risk and show potential for better than average returns.
The bottom line: The owner answered “yes” to five of the eight criteria, but realized he will be much better off if he can increase company profit margins, improve the skills of the management team and reduce the company’s reliance on three customers who make up 30 percent of revenue.
Are you doing everything you can to ensure your business stands out from the crowd?
Craig Allsopp of Corporate Finance Associates can be reached at 802-316-4121 or firstname.lastname@example.org.