14 Nov The 7 Traits of a Sellable Business
With 3.65 million baby boomers reaching retirement age every year, a historic number of small business owners are looking to pass the torch. As impressive as that number is, according to the International Business Brokers Association (IBBA), only about 20% to 30% of businesses brought to market every actually find a buyer.
- Stable and Predictable Earnings: Revenue, seller’s discretionary earnings (SDE), and price are often the top reason that initially attracts a buyer to a business. They look at the SDE from the perspective of what will provide them with an attractive livable wage as well as represent a sound investment after accounting for servicing the debt that they will incur to buy the business.
- Business Records: Buying a business involves high level of financial due diligence performed by both the buyer and their lender. It’s not only a matter of having professionally prepared books, but it may also involve being able to explain any notable fluctuations in Sales, Cost of Goods, and certain operating expenses.
- Management Depth: If a company’s success is more reliant on capable, well-trained employees than the owner, its value can more easily transfer to new management. When customers cite an employee’s excellent service in their reviews, frequently interact with someone other than the owner, and the institutional knowledge is vested in more than just one individual, the buyer feels more comfortable that the business will continue to succeed under their watch.
- Low Employee Turnover: Likewise, if your key employees have been with the business long enough to build up expertise, this too will appeal to buyers. In some businesses, like automotive repair, low level techs tend to come and go. This won’t be a deal breaker, but if, using the same example, the service writers and senior techs have been with the company for a number of years, this speaks well of the business.
- Customer Diversity: A broad customer base in which no single account represents a significant portion of sales helps insulate a company from financial hardship, and alleviates a buyer’s worries that a high-volume customer may depart after the sale.
- Standing Out from the Competition: Most small businesses don’t have the advantage of higher barriers that prevent potential competitors from entering their market. Satisfied and loyal customers, differentiation through branding, an efficient operation, and other attributes can make it more difficult for a competitor to step in and encroach upon your market.
- Growth Potential: When a Seller can describe realistic and achievable growth opportunities, a deal becomes that much more attractive. Some business buyers look for businesses that will help them strengthen their strategic position or expand into new geographical markets. Just realize that the what happens in the future under their watch does not influence the value of the business as it is now.
Because there is no such thing as the “perfect” small business, do not be concerned if your business does not seamlessly align with all these criteria. For instance, your business continues to consistently generate robust sales and net profit, but some degree of employee turnover is common in your industry. Similarly, you play an important role in your business, but your procedures are well documented, and these are easily transferable skills to a buyer with relevant experience.
Each business is unique and deserves to be studied on a case-by-case basis. Regardless, it’s important to understand a business buyer’s perspective and to work with Sam Goldenberg & Associates to be prepared to address these common concerns.
