How to Make Your Business More Attractive to Buyers
As a business owner, you’ve probably spent years doing the right things to build a successful and profitable company. In an ideal world, that would automatically translate to a bevy of buyers vying for your company when you’re ready to sell or take on growth capital. Unfortunately, the real-world transaction process is more nuanced. While some aspects depend on the type of buyer you’re working with, there are some universal steps you can take before even entering the market to make your business more attractive and accessible to buyers.
While this is most important if you are looking for a financial buyer (such as a private equity firm), most buyers will want to have key managers in place prior to a sale for continuity. If an owner is planning to remain with the company and continue to lead it post-close – in a founder recapitalization, for example – this is less of an issue. However, if the owner is planning to scale back involvement or exit the business entirely post-close, whether or not there is a succession strategy in place can be a significant factor in a buyer’s decision to invest. Buyers want to know that the business will continue to operate smoothly and grow their investment, and if an exiting owner has not spent time planning or transitioning the leadership of the company, this stability is questioned.
To best prepare the business and put a buyer’s mind at ease, owners should identify a successor early on, potentially years prior to starting a sale process. A successor could be someone from within the organization who has shown the skill and desire to lead the company, or be recruited from outside. Either way, you should spend time with the successor, mentoring them on the day-to-day running of the company, collaborating on strategic and growth goals, and even transitioning responsibilities or key relationships to them early on. The more hands-on experience your successor has, the more comfortable a buyer will be that the business can continue without you. If you are closer to a sale and are still heavily involved in the business, without having groomed someone to fill the President role, at least having that person identified can help alleviate a potential sticking point for many buyers. Of course, some buyers may be inclined to bring in their own successor. However, you won’t know who the eventual buyer is until you’re near a closing, so it’s best to assume that most buyers will want to see a succession strategy in place and make preparations sooner than later.
Lastly, part of a succession strategy can include defining early on what a transition period looks like for you post-sale. Some owners look to fully retire immediately, while others are willing to stay on as advisors or in some other capacity to help facilitate the transition of ownership. While some buyers would prefer a longer transition period, this is often not a deal breaker. It is something that will be asked early on, though, so owners should have already considered this point.
One of the most common reasons why a transaction is delayed relates to data: how quickly a seller can provide the data a buyer requests and how complete, accurate, and organized it is. This is something every seller can prepare for well before engaging with potential buyers. Organize your company’s data early on and create processes to update it frequently and access it with ease. Consider a central database for key business data and monthly financials; gathering and tracking this prior to entering a sale process can not only speed a transaction along, but much of this data can be used in your daily operations and strategic decision-making.
When collecting this data, take the time to review and understand it. Make sure you are able to substantiate and articulate explanations for any unusual deviations in your figures. Both buyers and their accounting advisors will dig into all aspects of your company’s financials and being able to anticipate questions and speak to them confidently will prevent potential misunderstandings and delays. Consider bringing on a full-time, in-house accounting role such as a controller or outsourcing to an accounting firm to close the books every month and ensure your data is accurate and organized. Buyers can move quicker and provide a more precise indication of valuation when the seller has taken the time to organize and substantiate data, as there are fewer surprises later on.
Another area that sellers will want to devote attention to pertains to a company’s breadth and diversity of customer relationships. Most buyers will prefer a diversified customer base (a good benchmark is no single customer accounting for more than 25% of total revenue), though this can be heavily dependent on your industry. Some buyers can get comfortable with a higher customer concentration if they understand the nature of those relationships. To eliminate this potential issue, take time to consider whether diversifying the customer base is possible and what steps you and your team would need to take to accomplish this. Keep in mind that any action here will likely take considerable time, so incorporate this into your long-term exit plan early on, potentially two years or more out from when you want to start the sale process.
Other housekeeping items to address prior to a sale can vary depending on your industry or company specifics. For example, if you lease a space for the business, make sure the lease has some runway left on it or renegotiate it now. Similar to the continuity concern with a successor, buyers want to know that the business won’t be uprooted or stuck with a huge rent increase immediately after a sale. If you own the real estate attached to the business, think through and articulate your plan for that asset. Make sure your benefit plans are in order – buyers will want to understand the depth and costs associated with them. If you are planning on changing the legal structure of the company in order to facilitate a sale, complete this process before approaching buyers. In general, buyers will appreciate a business that has its financials and legal filings in order before a sale.
Get Your Story Straight
As you get closer to a sale, having taken the steps above and others to button up your business and make it the most accessible to buyers, it’s important to articulate your company’s story and future growth opportunities. It may sound obvious, but this can take some time and a few iterations to ensure you’re presenting the business the way you want. You know your business in and out, but how can you explain it in a nutshell to an outsider? Think through high-level questions like why the business exists, why your customers choose your company, why your employees choose to work with your company, and what makes the company valuable. This is the “story” you are selling, and what serves as the initial draw for potential buyers. Make sure it reflects you and the company you’ve built!