What is a Potential Buyer looking for in a Business?
When selling a business, it is important to understand what a potential buyer may be looking for in a business. Below we outline some of the important aspects to recognize when selling your business. Keep in mind the type of buyer will matter. In general, there are three types of buyers:
- Individual buyers
- Strategic buyers
- Financial buyers
Each buyer will have different motivations for buying a specific business. As such the order of importance for the below items may vary. See Selling to a Financial vs Strategic Buyer for more information.
A business valuation can also identify what type of buyer will best meet the seller’s goals and how much a potential buyer may be willing to pay for your business. Peak Business Valuation as a business appraiser works with hundreds of individuals buying and selling a business. Schedule your free consultation today to get started!
Positive Cash Flows
One of the first things a buyer will look at when interested in the business is the cash flows. More specifically – positive cash flow. The cash flow of a business is the amount of money coming into and out of the business. This helps predict how much cash is available for future business needs. It also identifies how much cash is needed to cover current operations. Tracking cash flows on a weekly or monthly basis can help spot trends, prepare for the future, and identify problems. The goal of all successful companies is to have positive cash flow. For more information see The Basics of Cash Flow. As well as Managing Cash Flow.
Many potential buyers look for businesses with growth opportunities. A business valuation can help identify some of these growth opportunities. Specifically, these opportunities may include expanding current operations, creating synergy with an existing business, buying in a growing industry, and obtaining valuable intangible assets, among others. A business with an upward trend is attractive to potential buyers.
Return on Investment
The next item a potential buyer or investor will look for is a good return on investment. As such, they often consider the returns of the business and what the growth potential is predicted to be for the business. Businesses in growing industries with a growing track record tend to be more valuable to individuals looking for a business that will make a good return on their investment. Return on investment (ROI) is the amount of money the buyer will realize from the business in profit after servicing debt and taxes. Typically, a small business’s return on investment is anywhere between 15 and 30 percent. A business valuation can help identify what the potential return on investment may be. Peak Business Valuation, business appraiser, is happy to help you understand a company’s ROI. Schedule a free consultation to get started!
Running Independent of the Owner
This is one of the most important aspects of the most valuable companies. The more independent your business is of you as the owner the more valuable it becomes. Some businesses are so reliant on the owner or a key employee that if they were to leave, the business would fail. As such, from a buyer’s point of view, this can be a huge red flag.
Creating a business that is running smoothly without the owner takes time. There are several strategies to reduce owner dependence. Below are just a few ideas to get started. For more detailed information, see Reducing Owner Dependence.
- Build a strong management team
- Delegate decision-making and problem-solving
- Document all key information and processes
- Increase the confidence and capability of the team
The less dependent the business is on the owner the more sellable and valuable the business becomes.
Next, a potential buyer will consider all the financials of the business. The financials of the business tell a story. Messy financials make it difficult for a potential buyer to gain a good understanding of what is happening in the business and why. One of the best ways you can create a more sellable business is by keeping your financials clean. Hiring a bookkeeper and an accountant is one of the best practices to make sure everything is being documented and documented correctly. Keeping clean financials is vital for taxes, growth, and identifying problems and opportunities.
A Strong Company Brand
A business with a bad reputation, poor service, or amidst a business crisis is much more difficult to sell. Ensuring your business has strong branding within your industry and community makes it more attractive to a buyer. It can also give you more leverage when negotiating the purchase price of the business.
Low Customer and Supplier Concentration
Lastly, buyers don’t like high levels of risk. This can include the risk of customer and supplier concentration. If your business is heavily reliant on a single customer/supplier or relatively few, it increases risk. If the buyer were to buy the business and the relationship(s) discontinues it drastically impacts the business. Diversifying both the customer and supplier concentration makes it less risky for a potential buyer.
Understanding what a potential buyer is looking for in a business can help you when selling your business. Being strong in each of the above aspects helps support a higher selling price. Not to mention, you can market your business in just the right way to target the right type of buyer to meet your exit goals. A business valuation is very helpful in understanding what a potential buyer would be willing to pay for your business.
Peak Business Valuation, business appraiser, works with dozens of buyers and sellers of businesses each week. Understanding the value of a business is key in both instances. If you are thinking of buying or selling a business, Peak is here to help you along the way. Get started today by scheduling your free consultation!
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