Business Owners – What Buyers Look For In A Business

Business Brokers New York

 

 

 

 

 

 

 

 

 

It’s All About The Buyer

Most business owners give little thought to what buyers look for when contemplating the acquisition of their business. Rather, owners mostly seem preoccupied with what they need themselves in terms of the deal structure, especially what price they can get for their business. Now naturally, that’s important, but in order to sell their business, more thought should be given to what a prospective buyer wants, not what the owner wants…if they want to clinch the sale.

Keep Financial’s The Key Focus

Almost without contradiction, the first port of call for most prospective buyers is an examination of the financials. Prospective buyers expect well documented financial information, that is up-to-date and accurate. In my experience, too few business owners pay enough fastidious attention to this matter, often ignoring critical record keeping of this nature. Unfortunately, when time comes for the owner to sell their business, poorly presented financial information is a major element, which creates a high degree of frustration among many prospective buyers. If an owners financial information is either not available or in disarray, the buyers perception in the least is tarnished, but in the worst case it engenders suspicion of the owner and viability of their business.

Keep A Keen Eye On Profitability

Next to financial stability of the business, plus sound record keeping, comes overall profitability. And, profitability is one of the key factors in determining business value. Believe it or not, I have discussed this subject with hundreds of business owners who fail to grasp that poor profitability can substantially reduce business value. Owners are naturally proud of their revenue growth, but unfortunately pay little attention to expense control, to achieve respectable margins. In fact, this is generally the first question a prospective buyer asks me, “is this business profitable”? Alas, these days, unfortunately, I have to answer “no”!

Now, not all blame can be leveled against the business owner, since today there are many mitigating factors which affect an owners ability to run a profitable business. For example, local, state and the federal government are constantly creating many barriers for business owners, which put severe constraints on their ability to stay afloat. In addition, economic conditions these days are not conducive to high growth, especially those created by increasing inflation caused by Fed money printing, which wreaks havoc with an owners best laid business plans.

Customers and Markets Is A Major Buyer Concern

A third important aspect of the business, which is part of a prospective buyers due diligence, is size and structure of the owners marketplace. There are many more sophisticated buyers out there these days and they want to know market size, growth potential and other salient features, such as customer retention and satisfaction, which contribute to business business growth and longevity. Often, a prospective buyer requests a discussion with a key customer, which is usually a surprise request to the business owner, but is necessary requirement with submission of a Letter of Intent. This aspect of buyers due diligence must be handled very carefully, as there is potential for damage, lest it is not managed in a surreptitious manner.

More to come….check in soon!

Small Business…Myth or Fact

seminar_r
Myth #1…Customer’s are Always Right… 

A huge myth…if that were the case, nobody would be in business. Customers are certainly important, as that’s where all the sales come from. But, you can’t manage a business that way as customers are fickle and it’s a sure way of putting yourself out of business.  However, the customer is still the customer, therefore empathy and tact are required. As long as the customer knows what your policies are and you set their expectations correctly, customer satisfaction will be elevated.

Myth #2…Make It, and They’ll Come… 

How many times have I heard this line. Some of the biggest companies in history have tried this philosophy and it has failed. Just because a business owner creates a new widget, doesn’t mean customers will line up at the door to buy it. To be a sucessful entrepreneur you need to be the best marketer on the block. A first class sales organization and sales channel beats a whacky product idea anytime. Unfortunately, many business owners fall in love with their products instead of attacking the real challenge.

Myth #3…Sales Revenue is the Key…

Nope! How many times have small business owners proudly told me what their sales revenue is, as if that’s the magic key. Yes, sales are important, but as measure of performance it has no meaning. The only real measure is cash flow…cash flow…cash flow. It doesn’t make any sense to keep growing the company if it’s continuing to lose money. It’s not rocket science, but if there’s less money at the end of the month than at the beginning…failure follows…and maybe bankruptcy.  Build customer value and focus on cash flow and profitability and the financial rewards will follow.

Myth #4…Social Networks Drives My Marketing…

Unfortunately, social media does not work well for all companies and in some cases it’s simply a waste of time. Demographic analysis is the key…you have to find out where your customers they come from and how they interact with each other. It’s then possible to be highly selective and to focus on using a specific social media tool that they fraternize and become part of their conversation. Once you’re in their circle of influence, the rest is easy.

Friendly Advice for Sellers and Buyers

new-york-city-skyline-empire-state-brooklyn-bridge-free-stock-photo

Almost daily, I encounter inadequately prepared business owners wanting to sell their business. They are totally unaware of the ordeal they face in this rather overwhelming task. Whether for emotional, financial, or operational reasons, they have given little or no thought to how they want to gracefully exit their business. Yes, there are indeed those owners who do not fit this profile and they are really a pleasure to work with. However, at least 85% are in need of help, which more often than not, they don’t realize they need…that’s our number 1 challenge…but hopefully this friendly advice will help.

Sellers and Buyer Psychology

From experience, we know it’s not easy to turn a sluggish business around and that is exactly the task we face daily. Since the banking crisis of 2008, which caused the major economic meltdown, fewer and fewer businesses are now producing the levels of profitability, that is the basis of business value. Unfortunately, the bulk of the business owner have not come to terms with the changes in buyer psychology, along with the banking institutions more onerous lending policies…then there’s the ever increasing local and federal government intervention, imposing more and more punitive taxes and legislation. As a consequence, along with their lower than average profits, small business owners still have an unrealistic expectation of what their business is worth in todays market.

Now, there’s always two sides to an equation and in this case it’s the  prospective buyer. They are not going to get off lightly either. Many respond to business for sale ad’s, having carried out little or no research or planning on exactly what business they can really afford, or even if they are adequately qualified to buy and run a business. Many prospective buyers seem to respond to ad’s on a whim and this wastes their time, the business brokers time and the sellers time. We do as much as we can to weed out the tire-kickers, but there are only so many hours in a day we can spend at this task. In the same way as there are sellers who are well prepared, so too are prospective buyers. Again, these are a pleasure to work with, as they are knowledgable and professional. They may be rather demanding, but at least their understanding of the business sales process minimizes time wastage.

Yes, It’s all About the Financials

The biggest anguish for both brokers and buyers is lack of a adequate business owner financial statements. This is especially true if there is a sophisticated buyer and an unorganized owner. Frustration mounts on both sides as the prospective buyer tries to analyze the business, with a seller whose attitude is less than understanding. Frustration is also present in reverse, with a sophisticated seller and a buyer who lacks the ability to grasp all aspects of the business. This situation is far more harmful for the intermediaries reputation, as generally the business broker is representing the seller, not the buyer….therefore, a buyer who demonstrates incompetence reflects on the broker. Yes, the broker does as much due diligence as possible with the prospective buyer, but there is a limit to how much can be found out until we are in the dynamic environment….that’s when the rubber meets the road.

Depending on the level, that is, from main-street business to mid-market business, the quality of the financial’s are either non-existent or tending to elaborately detailed…with everything else in between. As an example of competence, there’s one anecdotal story of a business owner wanting to value his business before selling. On close examination of the P&L’s statements, which incidentally were prepared by the owners wife using Quickbooks, it was noticed that the LOC (line of credit) was actually being counted as revenue.  When we brought this error to their attention, it was like trying to explain quantum physics theories to a layman. Needless, to say we never performed a valuation, as they were never able to resolve the problem and produce rational statements. I could go on and on ad-infinitum, but you get the picture. Well prepared and accurate financial statements are an essential tools in presenting the business in it best light. Trying to understand a business from faded and Xeroxed tax returns, just doesn’t cut the salt.

Inventory…the Achiles Heel of a Business

Another buyers pet peeve, is unidentified or badly recorded inventory…especially for a manufacturing company with a multitude of products and parts that have to be warehoused. Despite the availability of relatively inexpensive computer hardware and MRP and inventory software, there are still businesses doing this complex task by hand. Needless to say, this lays the foundation for plenty of arguments between buyer and seller at a later stage of the sales process, about real or imaginary inventory and its value.

Buyer and Seller Chemistry

Occasionally, a situation arises when a rather abrasive buyer meets a seller for the first time. Unfortunately, it’s always a crap shoot if people will get on or not and it turns out to be awkward and embarrassing for all the players, buyer, seller and intermediary. Another anecdotal story relates to a business owner running what we would consider to be a very well managed manufacturing business. The prospective buyer was highly qualified, both financially and experientially. The minute we all met, when we entered the firms facility…it was obvious from the rhetoric and body language, this was not going to be a good visit. It is rare that a situation like this arises, but even from the “get-go” the chemistry was not apparent. Naturally, the seller was very disappointed, as all indications on paper was that this was the perfect fit.

Main-Street Business

A pet peeve mainly for business brokers doing main-street sales is the large number of prospective buyers, who rarely if ever, talk with their bank to determine if they are credit worthy and can obtain pre-approaval for a loan. This is definitely a time waster, since the prospective buyer might make an offer contingent upon obtaining financing…then the long wait begins, as the bank turns on their lending process, which is the case of the SBA might be measured in months not weeks. Despite the fact that we demand personal financial statements from prospective buyers, this is not a good indicator that the bank will provide the prospective buyer financing.

Mid-Market Business

For businesses in this segment of the market, which typically have revenue from $2 million to $50 million range, similar challenges exist as those in Main-Street, however, the scale is different and the stakes are generally higher for both sides of the deal. Despite the duration of the process, for a whole variety of reasons, the single biggest buyer peeve is the lack of availability of due diligence data once a Letter of Intent to purchase has been filed. Now, as M&A Advisors we counsel owners regarding this process, but asking for a certain document and receiving it can be a long wait. It is highly recommended as soon as the listing has been triggered, that the owner/seller step through the due diligence list we supply and begin to compile the required data and documents, way ahead of when they are required for inspection. This takes the stress away from all concerned with the process and actually saves time and money. And who doesn’t want to save money these days…we can help.