Business Sale Readiness Factor #1: Key attractions
Wednesday, 03 March 2021
At any point in time there are many businesses being marketed for sale. All have the hopes of selling quickly and smoothly while achieving a great business sale price. Some will be successful; others, sadly, will not. What makes a business stand out from a crowded marketplace? What are the key aspects that attract serious buyers and persuade them to pay good money to complete a business sale deal?
It’s difficult to distill this down to a short blog, but I set out below some of the key factors which tend to separate good businesses from attractive businesses:
1. Consistent and growing profits and positive cashflow
Let’s start with an easy point. Yes, businesses with consistent and growing profits will tend to be more attractive than those without. Shock! But it’s surprising how many business owners ignore this and assume they can brush over their poor performance with hard luck stories about the past and a long list of potential growth opportunities for the future.
Buyers are not attracted to uncertainty and they don’t like paying for potential. That makes it particularly difficult, but not impossible, in the current climate where businesses are contending with external events like COVID-19 and Brexit. The important thing for a business owner is to analyse the impact of these events, either positively or negatively, and show the underlying maintainable profitability of the business. If tweaks are needed to your business model, it may be best to implement these and not take the business to market until things have settled down and the true profits can be demonstrated.
As for positive cashflow, this is often overlooked by business owners. The chances are a buyer will need to pay for your business from its future cashflow, so they need to know the business will generate sufficient cash, not necessarily profit, to enable them to do so.
2. Being a market leader for your products and/or services
Note that I specifically mentioned “a” market leader, not “the” market leader. This is a subtle but important distinction. You don’t have to be the leader in your market, just one of them. So, think about things like your business reputation, share of the market, record for innovation, employer brand and customer satisfaction levels. Where does your business rank?
One of the exercises we do with clients is to help them review their suite of products and services. We then identify where each product or service fits in their related life cycle and pull this together using a ‘portfolio matrix’. Market leaders will have a good spread of products and services, with many at the early stage of their life cycle, which will be attractive to buyers of the business.
3. Having a high level of repeat sales from your customer base
I mentioned earlier that buyers don’t like uncertainty. They particularly don’t like uncertainty over future sales. So, the more you can demonstrate the loyalty of your customer base, the more attractive it will be. Ideally, this will be underpinned by contracts or framework agreements, but for many industries this aspiration may be unrealistic.
And if you’re currently only selling once to your customers, you’re missing a massive opportunity. It’s much easier to sell to someone you’ve already sold to before (assuming you didn’t mess up the first time of course!). It’s time to think about what other products or services you could sell to them, and how you can reach out to them, to grow your sales.
4. Difficulty for new competitors to enter your market
This links back nicely to the above three points. If it’s difficult for new competitors to enter your market, the chances are you’re going to have consistent and growing profits, be a market leader and have a high level of repeat sales. Ultimately, it will then be more attractive to a buyer of the business.
Of course, the barriers to entry in your market might be inherently low. For a website development business, for instance, it might be as low as someone simply needing a basic understanding of building websites, a laptop and broadband in order to set up in competition. In which case, it’s time to think more narrowly on what your edge is in the market. What is it that you do better than your competitors and that customers really value? This is what should drive your whole business, and what you should be protecting from others. When advising clients, we call this your ‘Sustainable Competitive Advantage’ (SCA). We work through an exercise with them to identify their SCA and then work out a plan to maximise the benefits this brings.
5. Not being heavily reliant on the departing shareholders
Staying on the theme of uncertainty, potential buyers often walk away from businesses that are overly reliant on the departing shareholders. Who devises strategy? Who makes the day-to-day operational decisions? Who has the relationship with the key customers and suppliers? Who drives things? With planning, much of these risks can be delegated, documented and systemised.
In truth, no one is ever entirely indispensable, but if the business is likely to fall apart the moment the shareholders leave, the chances are the buyer will want to save themselves the hassle and simply look for another business to buy.
The above key factor is taken from our free and insightful ‘Sale Readiness’ diagnostic tool which aims to give business owners a score on the nine key factors determining:
How attractive your business is for sale;
Whether you will maximise the final business sale value; and
The efficiency and smoothness of your business sale process.
The online tool takes only five minutes to complete and your results will highlight the top three factors which are working well and the top three factors which require the most attention before you consider a business sale process. You will also be able to see how you compare to the global benchmark (average scores of all completed diagnostics) on each of the nine factors.
Of course, if it would be helpful, my team and I would be pleased to discuss your results and guide you on your next steps. In addition, each month I will be releasing a blog, just like this one, on each of the nine business sale readiness factors to help bring them to life.
So, if you’re interested in selling your business get in touch with me directly, and start bringing your dreams to reality.
Next month’s blog: Business Sale Readiness Factor #2: Profit Maximisation