The seven things buyers look for when purchasing an established business
July 14, 2017
by Adrian Knight, Founder and CEO of Knight Franchises
As a team of franchise sales and resale specialists, we spend the majority of our time speaking with potential business buyers from across the UK, who are looking to invest in their next business opportunities. Over time we have seen a trend in the questions that buyers are asking us time and time again, regardless of the size, industry or age of the opportunity.
We have also seen that the sellers who have prepared their business opportunities in a way that help potential buyers answer these questions from the outset, are the sellers who gain the fastest traction and who ultimately achieve a quicker sale at a higher resale value.
We are going to take you through a brief overview of the seven common factors to consider when preparing your business for sale.
Factor One: Finances
As with every important decision, a good quality buyer will have some set criteria that they consider to be “non-negotiable” in helping them to reach an informed purchase decision, these will usually be in the form of a buying checklist.
One factor that is always on that buying checklist is EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization), which is one way of seeing how much a business has earned.
Example: Buyers will value a business based on a multiple of its earnings. If a business has a made £100,000 (as reflected by its EBITDA) and the industry multiple is 2-2.5x EBITDA, then a buyer would be valuing that business at circa £200,000 to £250,000.
Many business owners will structure their finances to minimise tax, however, if you are looking to sell your business within the next three years, then it will pay dividends (literally) to maximise your business earnings so that that you can achieve a higher EBITDA (and therefore resale value).
Factor Two: Structure
At the base of every successful business, is a strong structure and solid foundations.
By showing potential buyers that your business has a well thought out operating structure, the opportunity is going to appear even more inviting.
A buyer will want to spend as much time as possible on growing the business rather than getting stuck-in to the daily operations. We encourage you to analyse your current structure and see who carries out the bulk of the day-to-day activities. If the daily operations are being carried out by one or two people, try to spread that responsibility by utilising supervisors, team leaders and systems to drive the core day-to-day operations.
Factor Three: Systems
Buyers are looking for operational systems that help drive the business and deliver operational effectiveness and excellence. This is really about the technology you use, and how you use it to deliver to customers while simultaneously reducing costs.
We would recommend considering how you are using technology to drive efficiencies in your business. It pays to look at this from a risk perspective - the more you can move day-to-day operational and decision making responsibilities away from people, the more tempting it will be for prospective buyers.
Factor Four: Sales & Marketing Systems
We strongly encourage business owners to think of their sales and marketing systems like a tool kit. Within that tool kit you have several different tools and the tools that you will use depends on the job that needs doing.
You may have several different systems that generate leads which you can convert into sales. The more you can consolidate these systems and tools together and show case them to buyers, the more interest it will generate.
Good examples of this would be a proven Google Adwords campaign that you know converts, an outsourced appointment setter or an established referral system. You effectively want to present a ‘tool kit’ of systems that generates sales.
Factor Five: Recruitment Systems
Good buyers will want to know the breakdown of how employees are hired into your business.
Similar to your sales and marketing toolbox, you want to create a recruitment tool kit that lists out the different channels that you use and the average cost associated with each hire. This will show potential buyers that you’re not relying on one or two key sources, and that the business is stable.
Factor Six: Client Data
Buyers will almost always want to see a breakdown of client data. They will want to know things such as how many clients you have, average contract lengths, average revenue and GP per client, client sectors and the number of clients won/lost.
As a seller, you will want to use this as an opportunity to showcase the value of your business and increase its attractiveness to buyers. That doesn’t mean sharing confidential information such as client contact details. Rather, you want to showcase how much value you’ve created in your business (and from our experience, it’s much more than you may realise!)
Factor Seven: Sale Structure
If your business is being sold for six figures plus, then buyers will usually try to negotiate a structured sale, where they pay part upfront and the rest over an agreed period.
Structured payments can be a great option for sellers as well as buyers, we know of sellers who have charged a premium interest rate on the money owed that gave them a great return. The key to making this work is to think where your limits are, and to have a watertight contract put in place by a legal professional that can be enforced in a court of law.