You want to sell your company. An outside buyer has approached you and is evaluating it. What are some of the things they will be looking at?
The best way to handle this question is to look at it from the buyer’s perspective. In fact, it is always a good idea to look at things from the other person’s perspective, but that is a different topic.
While every company is different, there are a few things that will really stick out to a buyer. Know what those are.
It is a good idea to consider three important areas a buyer will be looking at. These are Management, Marketing, and Finance. For a manufacturing company, operations should be added to that list, but we will not discuss that here.
Here are some Red Flags.
Management
- Is there a high degree of turnover of personnel in the company? Especially in key management roles? The buyer will want to know why.
- On the other hand, has there been almost no change in key management positions over a period of many years? This may indicate a stagnant business that is not well respected by the competition. No one is being hired away for their expertise. Even worse, management may be dominated by the CEO or Owner and have not been allowed to develop their skills.
- When the buyer comes to visit, is the company’s management always being interrupted by emergency phone calls and underlings always demanding immediate decisions to solve some problem or other? That’s a red flag to a buyer.
Marketing
- At trade shows does the company show at least the same level of activity as its competition? Is it high energy?
- New product and service success is dependent on the company’s ability to see ahead. What percent of revenues are generated by new products? Is it 30% or higher? If not, your company may be stagnant and living off its laurels.
- Is the company gaining or losing market share? Are new competitors popping up and being successful? Look at both unit volume and pricing and how it compares to the competition. But unit volume is more important. Sometimes price increases will increase revenues but volume may give a clearer indication as to what is going on.
Finance
- Does the company produce high-quality, accurate financial statements on a regular basis? Monthly is best, but at least quarterly. Are cash flow projections made? Are the statements audited or unaudited? When selling a business, audited financial statements are always better.
- Look at Accounts Receivable and Payables. Is the company able to buy at quantity price breaks? Is AP (trade debt) paid on time? Is there good cash management on an ongoing basis? Cash shortfalls?
- What is the company’s relationship with the bank? If there is bank debt, does the company meet all the loan covenants? Are there unused lines of credit with the bank (if yes, that’s good). Can the company obtain credit elsewhere if necessary?
Obviously, there are many more things that can and should be considered by a buyer. I’ve listed more in other posts. In fact, entire books have been written on this subject. But many of these are straightforward items.
The seller should fix these issues NOW before the company is put up for sale.
