Building Business Value: Improving Your Asset And Building A Company Everyone Wants To Buy
by Dave Driscoll
How do you build the business that everyone wants to buy?
Simply look at your business through the eyes of a prospective buyer! You MUST view your business from that perspective or you will struggle to sell the business and have a successful exit to your retirement and your Life Beyond Business.™
If you are old enough to remember Famous-Barr in downtown St. Louis, I want to remind you of that feeling when you walked by the store display windows. When we were kids, a family outing to look at all the fabulous Christmas displays was a tradition. All the Christmas trees, lights, decorations, tinsel, fake snow…and all the toys! Toys of all kinds were displayed, many in action. It’s what dreams were made of!
Think of what it would be like if your business were in that store window – sparkling, cleaned up and polished, blinking lights and all … something everyone wanted for their own. It doesn’t have to be a dream; you have the power to make that dream a reality.
To build defendable value that will result in a salable business, you need to look at the business through the eyes of a buyer.
RISK is the primary focus of all buyers. At the end of the day, buyers want their risk level to be as low as possible. How do they achieve this? By pushing more risk to the seller.
Think about that “tug of war” game we’ve all played at some point in our lives. The objective is to manage the position of the flag that marks the middle. If most of the rope ends up on your side, you win!
Tug of war is inherent in all business transactions. When selling your business, the objective is to keep the flag in the middle. Playing the game to a tie that balances the benefits to both seller and buyer is the objective.
What elements are most important to the buyer when considering the risk to purchase your business?
Cash flow. Can the buyer be confident that the business’s cash flow will provide for their needs and lifestyle, repay the purchase price within a reasonable time, and grow in value to create the future nest egg the buyer will need for their next phase of life?
Is what they see, what they get?
- Are the financials believable? Are they organized to tell the accurate story of the business? Is the buyer assured that the numbers represent the true financial position?
- Business operations and corporate hygiene. To minimize risk, a buyer who is investigating the purchase of a business must be able to visualize themself successfully operating the company. Does the business have a detailed operations playbook identifying every position with detailed procedures? Are employees trained to the playbook and held accountable? Are HR policies documented?
- Is past performance indicative of future expectations? Are the historical financials recorded and presented logically, reflecting the true performance of the business? Historical performance is critical in quantifying risk for the buyer. What is the business’s trajectory? Is it growing steadily? Declining? Maintaining status quo? Has there been a recent increase or decrease in revenue that does not conform to historical norms? If so, why?
The prospective buyer must have confidence in these critical areas to proceed with the acquisition process. If the current owner either fails to demonstrate — or loses — credibility during the process, chances are very low that they will sell and achieve their exit objectives.
In the upcoming months, I will highlight three tips for owners who are preparing their businesses for sale. (And EVERY owner should be preparing their business for eventual sale!) By understanding these tips, following the relevant recommendations, and viewing the process from a buyer’s shoes, you WILL create a business that buyers desire.
Dave Driscoll is president of Metro Business Advisors, a business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.