Selling your Business : Buyers: Why they buy & What they want.
Selling your Business - Make sure that you know Why Buyers Buy:
As a California business broker, I get asked frequently what I like about being a business broker. There are many reasons, but a big one is that this is challenging work. Businesses are difficult to sell because, in a lot of ways, businesses are intangible. Some exceptions are businesses such as gas stations, car washes or self-storage where the property is integral to the operation of the business. For the most part, part of what you are selling is not something that you can see or touch. By this I mean the goodwill, intangible assets, and the ongoing operation. Buyers and sellers have very different points of view when it comes to placing a value on these assets. On this page my goal is to speak to business owners and try to convey some of the reasons why buyers buy businesses.
When selling your business or whenever you're selling anything it is important to know the motives of your potential buyers. As mentioned in the section entitled "Business Pricing", buyers typically look for cash flow when they consider buying a business. The term "cash in king" is frequently used. Even in larger, middle market deals and even in strategic or synergistic buyouts, earnings or cash flow is still the main driver that pushes the deal forward.
If a buyer is buying a business with the intention of being a full-time owner/operator, the cash flow must service the debt on the business, and still provide an acceptable income for that buyer. In the case of a strategic buyer, or an investor the business must be able to pay for the debt service and still provide an adequate return on investment. Typically the return on investment must be greater than they can find elsewhere with less risky investments.
Second to cash flow would be strategic fit or desirability of the business. In the case of an owner/operator, they may just have a desire to be in that type of business. For a strategic or synergistic buyer the overall fit of the business is more than likely what prompted the acquisition effort in the first place. To a lesser extent taxes or the mitigation of taxes may also play a role in some of the larger deals.
Lastly, intangible assets such as patents, trademarks, technology and brand names play a role in the overall desirability or value of a business. If you would like to learn more about intangible assets please
take a look here to
review the page that discusses intangible assets in greater detail.
In summary, a very simplified explanation of why buyers buy is that the people that are buying a job need to make an acceptable living, and for the larger deals, business must be a strategic fit, but also generate an acceptable return on investment.
Selling your Business - What Buyers Want:
There are several things that buyers want to see when they are investigating a business that they are interested in acquiring.
One of the most important things that buyers want to see are good financial records. At a minimum, buyers would like to see three years of profit and loss or income statements verified with tax returns. As I mentioned on the pages entitled business pricing, a business's books provide evidence for that business's cash flow. A buyer will typically examine the records to be able to verify a business's earnings so that the business could support the debt service and provide the income or ROI the buyer is seeking.
Next in terms of importance to buyers, is a good price and terms. Virtually every business transaction has a financing component. All cash deals are extremely rare. A price should be supported by market data or with a formal valuation. When selling your business, financing (seller or bank) will probably play a part.
Lastly, most buyers are concerned about the transition period. Anything a seller can do to facilitate the transition period between owners will go a long way in making the deal happen. In the section entitled Deal Structuring I will discuss the transition and the infrastructure systems that should be in place in greater detail.
A business owner who can understand the perspective of a buyer and one who can accommodate the needs and desires of a buyer will greatly increase the chance that their business will sell- and sell for a good price.
If you're a business owner and you're reading this, it's a good chance that you're considering selling your business. I would like the opportunity to speak with you to discuss how I can effectively market your business and bring you ready, willing and able buyers. I urge you to
contact me today
so we can have a conversation regarding your unique business.
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