Many businesses fail to achieve a potential valuation or maximum selling price. While no business is perfect without flaws or challenges, businesses that sell above the valuation range or command the highest multiples embody a number of common characteristics.
1. Increase income/profits. Cash is the fuel for business. Businesses that have strong finances with year-on-year growth in revenue and profits will be in demand and should achieve attractive valuations.
2. Clean Book. Having accurate, detailed, current and professionally prepared financial reports and records is one of the most important components for successful business sales.
3. Bright prospects for the future. Businesses operating in industries that have strong prospects for sustainable growth in the years to come will be in high demand.
4. No customer concentration. Businesses that have a diverse and broad customer base will have a lower risk that the loss of a single customer will have a material impact on business revenues and profits.
5. Multiple vendors. A company with a diversified product and/or service offering with many suppliers and partners will be a less risky acquisition than a company that relies on only one manufacturer or service provider to generate revenue.
6. Stable workforce. Having a loyal and satisfied workforce with long-term employees is always a positive attribute for a buyer looking to acquire a private business.
7. Defined Process. Businesses that have written procedures detailing workflows and operational processes provide greater continuity during the transfer of business ownership.
8. The owner is not a business. Companies where the owners lend their expertise by working “on” the business vs. “in” businesses are less likely to experience loss of revenue during sales. Owners who have become the face of a business where they are one of the main reasons customers use their product or service create challenges for new owners in retaining these loyal clients.
9. The business is eligible for acquisition funding. A business for sale that qualifies for funding acquisition by an SBA-backed bank or lender will benefit from their ability to be marketed to a wider audience. Certain issues prevent third party funding from being secured including poor financial performance or messy books with unreported cash and dubious additions.
10. Professional Advisor. Successful business sales require a team of professional advisors who are experts in their fields. Members must include an experienced M&A advisor or business broker, a business attorney who specializes in transactions, and a CPA with knowledge of tax structuring and asset allocation. Experienced advisors are worth gold and will add value that far exceeds the costs involved.
Small business ownership involves some degree of risk. The assessed business price must reflect the level of risk. While the element of risk can never be removed from small business ownership, the ten characteristics described above should mitigate many of the issues that cause buyer concern when making an acquisition. This in turn will allow business value and selling price to be maximized.
