Selling a Business: Understanding What Buyers Are Looking For
So what are buyers looking for in a business?
Whether it’s their first purchase of a business or their 10th, buyers are looking for an ongoing income.
Not surprisingly then, they’ll be attracted by businesses with a proven track record of consistent financial performance with solid, growing revenue and earnings.
Will the buyer be able to see themself in the business?
Let’s follow a prospective buyer; we’ll call him Tom. Tom meets with a business broker to assess his skills, interests, financial resources and experience as well as his personal and financial goals. This process equips the broker to pre-screen businesses for the ideal fit. If the right business is not there now, it may be in the near future.
Tom is quite taken with one business in particular — an automotive parts store. Tom’s been tinkering with his own and his friend’s vehicles since his teens so a somewhat-related business is appealing. He currently manages a call centre so he has a skill set that’s transferable.
The store’s cash flow looks good. It might be enough to give him a decent salary and cover financing payments. But the purchase price is higher than Tom thought it would be. He knows the seller is willing to take back a note for part of the cost, but is concerned that the down payment will be too high. He can’t overspend as he needs working capital after the purchase.
He really wants to see the business though. His broker can set that up, maybe sending him as a mystery shopper.
Preparing for the walk down the business aisle
So now this potential buyer is about to make his first visit to the business. He has signed a confidentiality agreement and he is serious.
Are the premises clean? Is the equipment well-maintained? Is the inventory current? How will he be treated? First impressions matter.
Tom will want to know more about operations and opportunities:
- Does the business have a wide range of clients/customers or is there a concentration of accounts in any one area? A concentration is a risk.
- What about suppliers? Does the business depend on a select few? How long are their contracts for?
- How involved is the existing owner? If involved in most every aspect of daily operations, then how will the business function with a new owner?
- Is there a good operations manual and staff training program?
- Is the intellectual property protected?
- Will staff and clients stay?
Buyers need assurances; sellers need to find ways to provide them. Having the seller stay on a few months after the sale to assist with transition or training will alleviate concerns and help a new owner get acquainted with staff, clients and suppliers.
Back to Tom. He’s still nervous, but wants to make an offer, with the understanding he can retract it for any reason up to the last day of due diligence.
A business is only worth what a buyer will pay and what a seller will accept
Both parties need to be comfortable with the other’s ability to deliver what is promised. The detailed work of verifying financial and legal matters happens at due diligence—that’s when the lawyers and accountants play key roles. But getting to that point requires give and take on both sides.
In negotiating a business deal there are many things that are important, but none more so than price and terms.
Tom understands that we’ll need concessions from both sides to arrive at a deal that works for both parties. He may not get the price down by much, given the value the business represents in the market and his own need to secure financing for the purchase.
In most cases a buyer needs the seller to take back a note for a portion of the purchase price, paid off over time. This “vendor take back” bridges more than financing—it reassures a buyer that the seller is confident the business will pay for itself, mitigates potential unknown future liabilities and provides assurance that the seller believes this buyer will be successful.
Another part of the price and terms is the all-important down payment. Tom can’t let the down payment deplete his cash. Even with an immediate cash flow, working capital is needed to keep the business going. He must also keep something aside for the unexpected.
With the broker’s help, Tom and the seller work out the deal. Tom is satisfied he’s getting a good business that will meet his current and future needs. And the seller continues preparing for the future, knowing the business will be in good hands.
Provided nothing takes the deal off course at due diligence, we’ll be toasting their success at closing!
Serious about selling?
If you are serious about selling your business and you want the sale to be managed as expediently, professionally, and profitably as possible, you owe it to yourself to spend some time with a Sunbelt representative.
Please contact the closest Sunbelt office at your convenience to speak with one of our representatives, who will be glad to answer any additional questions you may have.
In this private and confidential interview we can provide further insights that will help you determine if your business is ready to sell and if your sales expectations are realistic.
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