Many individuals begin their business with the hope of one day selling their business or being acquired. Whether you are just starting your business or in the process of growing your business, it is important to think about your exit strategy. Even if this is not for several years, thoughtfully building your business not only helps the business thrive but positions for acquisition when the time comes.
Many business acquisitions do not work out as planned. While it is a sad reality, sometimes the business owner receives significantly less than they planned, or the business does not sell at all. In most cases, having a written succession and exit plan can help prevent many of these problems. The successful sale of your business begins with daily decisions. As a business appraiser Utah, here are some factors that will help you better position your business for acquisition as you start and grow your business. For additional questions, schedule a free consultation with Peak Business Valuation.
Understand Potential Buyers
The first step to preparing your business for acquisition is to understand what potential buyers are looking for and their motivations. This can help make your business more attractive to potential buyers.
1. Return on Investment
One of the biggest factors a business buyer looks for is a return on investment or ROI. For instance, strategic buyers, purchase a company because of the synergy the acquisition can create. As such, a strategic buyer may be willing to pay a premium for the business. Whereas a financial buyer will be looking for a fair purchase price with a healthy return on their investment.
Many tech-startups develop their business with the hopes of appealing to strategic buyers. They expect a buyer to purchase the emerging technology or the great idea despite the lack of financial history. Even with tech acquisitions or the acquisition of a company with a unique tech asset driving the purchase, the ultimate goal is to leverage the technology to drive ROI. Every buyer wants some assurance that the business will continue to be profitable.
2. Historical Trends
Next, a buyer will look at the financial trend of the company. Are profits trending upward or downward? Is the company growing in revenue and earnings? A business that is healthy and growing is more desirable to a buyer than a business that is declining. A serious buyer will want to see a business with stability and growth. The best indicator of this is the recent business history.
A business valuation expert can help you understand where your business currently lies. A business valuation report will analyze your current and historical financials. With every valuation Peak Business Valuation, business appraiser Utah, performs we help the business owner understand the strengths and weaknesses of their business. We then help identify steps they can take to grow the business.
3. Company Risks
There are many different risks a buyer will want to be aware of prior to the acquisition. Here are a few of the risks a valuation expert can help you identify.
Dependence on Another Company:
For instance, suppose you create a company to help individuals start a blog using WordPress. In this business model, the company relies on the success of WordPress. Be sure to reduce this risk by diversifying and not being dependent on another company’s success.
Supplier Concentration:
It is important to diversify and have backup suppliers. You may not necessarily need to use multiple suppliers. However, it is wise to have a backup supplier should a need arise.
Client Concentration:
Is your business highly dependent on one or a handful of clients? If most of your revenue does belong to one or two clients, there is a greater risk associated with the company. For potential buyers, there is a high risk that the clients may be loyal to the business owner rather than the business. As such, they may leave with the transition of ownership. In this situation, it is important to dedicate resources to building and nurturing smaller clientele.
Dependence:
As a business appraiser Utah, we see the following as one of the primary hang-ups for business acquisitions:
Business Owner Dependence
This is a large risk for many small businesses. The more dependent the business is on the owner the more difficult it may be to sell. For strategies to reduce this risk see Reducing Owner Dependence.
Key Employee Dependence
Are there individuals in your company that are crucial to its success? Can another individual fill their role? As you grow your business avoid placing key people in positions that become too difficult to replace. Developing standard operating procedures and checklists can help avoid this and make every role and job replaceable.
Company Seasonality:
As a business appraiser Utah, many buyers want to see consistent and steady revenue. For companies who have busy seasons, this can be difficult. However, through adequate planning and preparation, you can develop a business cycle that capitalizes on sales during this time. Developing products or services that appeal to customers during the off-season can also be helpful. For instance, many lawn care services or pest control companies are slower during the winter months. Offering services with similar infrastructure needs can help, such as hanging lights during the holidays or performing snow removal services.
Legal Issues in the Industry:
If your business is in a highly regulated industry be sure to have the proper licensing and paperwork in order. Companies in industries that currently have legal concerns or issues may increase the risk for potential buyers.
4. Clean documentation
Last, be sure to keep your books and financial records clean. Potential buyers will want to review the financials prior to making an offer. Investing in organization tools now will pay dividends when it comes time to sell. Based on our experience as a business appraiser Utah, hiring a bookkeeper early can help you stay on top of this from day one.
A business plan can also be helpful. It details the different aspects of your business from marketing to customers, strategy, core service, etc. A business plan can help you identify what your business looks like and if there are any missing pieces.
Summary
Thinking through many of these issues can help you begin now to reduce risks and make your business more easily transferable. Creating a strategic plan from the beginning will make your business more attractive and more valuable when it comes time to transition. A successful acquisition begins with daily preparation.
Peak Business Valuation, business appraiser Utah, is here to help you position your business for acquisition. Through a business valuation, you can understand what the value of your business is today and identify areas to grow your business. Questions are always welcome! Schedule your free consultation today!
