After you’ve estimated the value of your business, settled on a reasonable price range, and put the sale process in motion, there are proactive steps you can take to make sure that the sale is as successful as possible.
From an objective point of view success means simply closing the sale. But from a subjective point of view—your point of view—this means ensuring that the transaction happens at the higher end of that price range. No doubt you will be happy if the sale closes in a reasonable period of time, but you will be much happier indeed if that sale closes for, let’s say, $500,000 rather than $415,000.
This may sound labor-intensive and time-consuming, but we aren’t calling for a drastic increase in the number of clients or overall sales. Here, we are going to talk about one simple distinction that can tip the scales in your favor.
Maximizing the value of your business requires that you know some key points:
- The two—and only two!—types of business buyers,
- Which buyers will pay the most for your business, and
- How to tailor your business so it meets the needs of those buyers.
We will cover these three items below.
Two Types of Buyers
There are two types of business buyers, and each type approaches your business with different ends in mind.
Investment Buyers
The first type, investment buyers, purchase businesses based on cash flow. They buy a company for its income stream and for an opportunity to increase that income by growing and improving the business.
These buyers may be younger entrepreneurs looking to make their first foray into business ownership who don’t want to go the traditional startup route and understand that buying an existing business is a safer alternative. They may also be well into their working lives, but dissatisfied with the corporate 9-5 world and want a change. You may also have investment buyers in their mid- to late-50s who have left their previous jobs but aren’t quite ready to go into retirement.
The value of a business to an investment buyer is a function of how much cash flow the business produces and the likelihood that the cash flow will continue in the future.
Strategic Buyers
Strategic buyers, on the other hand, purchase businesses based on something more than just cash flow. They purchase a business for access to a component of the company that can be used to improve or expand the existing business at a lower cost than organic growth through internally generated sales or expansion. The cash flow it produces is secondary. These components can include an existing customer base, special technology, or employee skills, or even access to preestablished business systems.
The key for you as a business seller is that the strategic buyer will pay more for your business than an investment buyer.
Sabre and Dunder Mifflin
Consider a company that sells printers, let’s call it Sabre, and it wants to sell its products into a new market. It could try to sell directly to that market. But its sales would be limited by the experience and credibility of its sales team in that market and by its understanding of the market’s needs and terminology. It would, in essence, be a startup, with many of the problems and concerns that we laid out earlier.
If, on the other hand, Sabre decided to buy a paper company, let’s call it Dunder Mifflin, which already served the new market, it would acquire Dunder Mifflin’s customer base and products or services, as well as an experienced sales force with a reputation and staff experienced with the new market.
Purchasing Dunder Mifflin is a strategic acquisition because, in addition to the cash flow coming from Dunder Mifflin’s established operations, Sabre can grow its original business by piggy-backing on Dunder Mifflin’s existing distribution network and by selling more of its printers through the new sales channels. It may also be able to improve Dunder Mifflin’s profits by cutting costs from duplicated back office operations.
Sabre can make a case that Dunder Mifflin is worth more to it because of the return from the added sales of Sabre products to Dunder Mifflin customers and can, therefore, pay a premium over a straight cash-flow-ROI analysis.
Creating a Strategic Buyer for Your Business
Creating a strategic buyer market for your business requires forethought and planning. And, unfortunately, most small businesses are purchased by investment buyers precisely because the owner hasn’t planned the exit in advance, considered who could be a strategic buyer, or tailored the business for those strategic buyers.
As I have said many times before, you will leave your business at some point. It is as inevitable as the sun rising tomorrow (at least for another 5 billion years!). If you don’t sufficiently plan for that exit, you will be throwing money away.
Identifying sources of potential strategic buyers can be a challenge. Begin by asking yourself some basic questions about your business, industry, and wider market:
- Are any companies obvious strategic buyers for your business (i.e. direct competitors)?
- Does your business operate in a particular niche (market, geographic area, etc.) that a related industry could exploit with complementary services or products?
- Does your business provide a product or service that a buyer could offer to its existing customers to increase the lifetime value of those customers?
- Does your business have proprietary systems (e.g. sales, service, production, etc.) that a buyer could use to improve its own operations?
- Has a competitor previously tried to sell into your niche but failed?
All of these scenarios offer possible strategic buyers for your business.
Dress Your Business to the Nines
Once you’ve identified possible strategic buyers, you must put in place the structure that will maximize the value of your business to those buyers. In effect, you need to assess and take steps to improve your business’ salability.
What exactly that means will partially depend on your answers to the questions above, the types of strategic buyers you can identify, and how much time you’ve left yourself to prepare for your sale. Here are a couple steps you can take now to make your business more appealing to strategic buyers and maximize its value:
- Cultivate a customer base. Build a good-quality customer base in a well-defined niche. Narrow down your company’s value proposition for your customer and take care to cultivate repeat customers who appreciate the value that your business provides to them. Make sure to compete for these customers on service or technological expertise only, NEVER compete on price! Customers who only patronize your business for the cheapest product are the least loyal and the most expensive to acquire.
- Watch your profitability. Analyze every decision based on profitability. If you invest in the business, make sure you know when you’ll receive cash flow from that investment. Be sure profit will grow.
- Hire and train quality employees. Create a culture and incentivize your key employees to view the business as owners, even if they’re not. Your key employees are part of your business’ value proposition, and you should have ‘golden handcuffs’ keeping them in place.
- Systematize the operation of your business. As many aspects as possible of your day-to-day operations need to be codified and written out. Systems will allow consistency across your business. If the business requires you or a certain employee to run it, it will be much less valuable to all buyers.
The best way to increase the wealth you will realize from the sale of your business is to consult with an experienced business advisor. But even taking a few of these steps will put you above most other businesses owners.
How Can We Help You?
Here at Alexander Abramson, we focus exclusively on business-related legal matters. Ed Alexander is also a Florida licensed business broker and a shareholder of FitzGibbon Alexander, Inc., a Central Florida consulting, business valuation, and business brokerage firm. Our attorneys have advised business owners for decades on business sales and succession planning.
Our staff focuses on creating a wonderful client-experience by actively listening and maintaining open lines of communication, consistently meeting deadlines, and being upfront about our pricing and services. Don’t trust the legal needs of your business to an attorney that can’t or won’t offer you the best service possible.
We would love to speak with you directly about how we can help you sell your business. Call us at 407-649-7777 or email a team member to set up an initial consultation.
