What do Buyers specifically look for when buying a business?
Or stated another way, what factors affect business value?
What increases or decreases business value?
There are many things that affect business value. Some may be obvious others not so much.
But all will require that you, the business owner, pay attention to them.
Here are seven factors to consider.
1) Poor Quality Financials. Having poorly prepared financial statements means the Buyer may not know what he/she is buying. And there may be hidden problems in the company. It is best to have independently audited financial statements that do not contain errors. This is the one major time the CPA profession adds value! It is what your CPA is trained to do.
2 ) Up/Down Sales History, The more reliable your revenue streams are, the more value your business has. One-off revenue transactions are at the bottom of the scale. What you want to get is a recurring revenue stream that is dependable.
3) Business Growth Prospects. This can be somewhat subjective and many of the factors contained on this list contribute to growth prospects. Most Buyers are not willing to pay for the possibility of future performance without being utterly convinced it will happen. They will usually only pay for what is happening now. There are exceptions as in technology companies or startups. Or if the company has shown a history of continuous growth in earnings (cash flow) and it looks like this growth will continue.
4) Sustainable Competitive Advantages such as great technology or IP, exclusive distribution rights, a brand or a highly loyal customer following are sure value creators for any business.
5) Unpredictable and/or Uncontrollable Profit Margins (Gross and Net). Companies that generate stable, above-industry-average earnings (cash flows) are more valuable. More stable earnings mean a lower risk that business earnings will not decline unexpectedly.
6) Management Depth. Great companies succeed by attracting, training, and retaining great people. Such a workforce is one of the most valuable business assets. If everyone reports to a business owner or the customers and suppliers will only speak to the owner, that is a problem. The owner is the center and hub of the company. The value of the company is greatly diminished if the owner is looking to sell (leave).
7) A Diverse Product and Service Mix. This can be the hallmark of a successful business. This helps companies overcome seasonal variations in demand as well as establish themselves as a one-stop shop for many customers. However, if a company has too diverse a product/service mix it can lose focus and not provide an excellent experience to the customers. Plus the company’s brand might be harmed.
There are other factors too, which I will discuss more in my next post.
