Let’s be brutally honest from the outset. Buyers want a return on investment, they want to see any acquisition give them future growth and future opportunity, and they want to remove risk!
When it comes to buying an SME, the appeal is clear: The founders typically began their business because of a passion or a dream and that has fuelled the journey to this point. These businesses are established, profitable, and more often than not offer a superior product or service than their larger competitors. SMEs are small enough to remain agile, but large enough to be attractive to a wide range of trade buyers. These buyers are typically looking to diversify their products and services, or deal with the threat of a rising competitor.
However, as you might expect, a buyer looking to maximise their return on investment and reduce risk will aim to do so by reducing the price paid.
As a sell side advisor, it is our job to maximise the value of our client’s business, and there is no better leverage than ‘competition’. Generating a competitive environment of strategically motivated trade acquirers is likely to be the single most important issue you will address when selling a private business. It’s the foundation of everything we do at Kingsbrook. More on this subject can be found in another blog here https://bit.ly/KBHNTV1
However, competition aside, there are characteristics that can be built into any business that make it more likely to achieve a premium at exit. Improving offers by reducing the risk perceived by the buyer. Below we talk about 9 areas that founders can be thinking about as they prepare for an exit.
- Predictable Profitability
Yes, turnover matters. But what buyers are really chasing is profit (and more importantly potential for future growth in those profits). Buyers look closely at EBITDA (earnings before interest, taxes, depreciation, and amortisation). A business generating steady, upward-trending profits with no nasty surprises in the books will always stand out.
What puts them off? Erratic margins and financials that need deciphering. Consistency in margins and clean, accurate accounts gives purchasers confidence in what they are buying and reduces risk.
However, it’s also important to be aware that it’s not just a glance in the rear-view mirror of past profit that will interest buyers. Serious buyers, buyers that pay a premium must be convinced that there is the demonstrable potential for future growth under their ownership.
- A Recurring Revenue Model
Recurring revenue is super attractive to buyers. It’s pretty clear why. Businesses with predictable, contract based, or subscription-based income are far more attractive than those dependant on one-off sales. The future is dependable, less risky, and buyers are likely to pay a premium for it.
If you don’t currently have recurring revenue, it’s well worth thinking though your existing business model and asking yourself how you can build dependability into you revenue stream. Perhaps even considering what other products, services, information or solutions could be developed, that could be sold on a recurring basis?
- A Business That Doesn’t Rely on You
Is the business you, or do you simply own it? Owner dependence can be a red flag, unless as owner you really want to remain and be part of the newly acquired business’s future growth. Buyers are looking for documented processes, a capable management team, and customer relationships that don’t hinge on one person.
If you’re the rainmaker, the brand, and the key contact for every client, it’s time to step back and delegate before you step out. Or make it very clear your intent is to stay with the business and continue your valuable input
- Diverse Revenue and Strong Clients
Customer concentration is another red flag. If a significant proportion your revenue comes from one or two clients, it will add perceived risk.
Buyers want a business with a well-spread customer base, ideally growing and with some great names on that list. It’s quite possible that the buyer is wanting to sell some of their products and services to your market so the better the customer list the more compelling that opportunity.
- Evidence Based Clear Path to Growth
Buyers are rarely interested in buying what your business is today; they’re buying what it could become. Is there room to scale? Are there opportunities in new markets? How easy is it to add new services or products?
Businesses with a clear, believable growth story attract more potential buyers and will likely result in better offers. In particular, any maths-based evidence of past growth can be a huge asset and can be used by the seller as well as the buyer to project reliable future growth opportunities.
- Brand, IP and Market Position
Buyers are drawn to businesses that stand out. Having formally registered and protected IP adds significant value. It can serve as a barrier to entry for competitors and can be a driver for strategic acquisitions.
Other ingredients can also be highly attractive e.g. having a strong social media presence, a successful YouTube channel, proprietary technology, unique expertise, or strong SEO presence. Your online value especially if your business is a trusted online voice can be a real plus.
- People, Culture, and Contracts
A strong credible team can significantly boost value. Buyers want to be assured that your key staff are motivated, likely to stay and have proper employment contracts.
Culture matters too. Is the workplace positive, do you have good staff retention.
If the buyer senses potential instability, expect renegotiations or retreat.
- Systems, Tech and Scalability
Buyers want to inherit businesses that are operationally efficient. Good CRMs and clear reporting dashboards give buyers confidence in what they are buying. It also makes integration easier and the more systemised and automated, the easier it is to scale.
- Deal Readiness
A business that is ‘exit-ready’ is far more attractive. This means; shareholder agreements are clean, legal and tax structures are in order, and sales and supplier contracts in place. It’s also important that there are no unresolved messy company loans or director loans. Investing in advice in this area ahead of planning a sale pays off.
Final Thought: Think Like a Buyer
Buyers are looking for businesses that offer low risk, high potential, and a clean path to future growth. The more you can show past success and demonstrate the potential for future growth, the more attractive your business becomes.
If you score ten out of ten on all of the nine areas in this article you are ripe for a successful sale! However, for most businesses each of the nine areas can be improved relatively easily. If you would like a conversation to explore these eight areas or if you’re considering an exit in the next 1–3 years, now is the time to start preparing. Happy to talk take a look here
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