Is selling your company part of your exit strategy? Here are 5 big considerations a strategic buyer will look at when evaluating the value of your business.
1. Purpose for Buying
The first thing a strategic buyer will consider is their own purpose for being interested in purchasing your business. Some reasons a strategic buyer might be interested in purchasing your business are:
To gain market share and increase sales volume simply by eliminating a piece of the competition. Think about your company’s position in the market and how that position will help or hurt your ability to sell at a premium price.
To help the strategic buyer gain industry competencies in areas that their current organization is lagging. Take a look at your potential buyers and learn about their businesses. How does your organization differ from theirs in a way that will appeal to their long-term success?
To enter a new market. They may be interested in entering your geographic market, appeal to your demographic market, or to diversify their products or services—just as a couple examples.
2. Dependency on Current Owner(s)
The less dependent the sales and operations of the business are on you and/or other owners, the more valuable your selling price is going to be. A general rule of thumb is that no more than 10% of the sales of your business should be dependent on the efforts and connections of any one person—particularly the owner. Operations also need to be largely independent of your direct involvement. Ask yourself (or, better yet, try it): Would my business survive for 90 days without me? If not, it’s time to start developing and executing a plan to make your business run without you.
3. Strength of CFO & Financial Records
This is a critically important factor that a strategic buyer will certainly assess. The lack of strong financial management and statements will usually cost you much more in the selling price than the cost of preparing them. If you are lacking in this area, consider working with your CFO to bring in a 3rd party financial expert who can help bring systems and statements up to date.
4. The Strength of Your Management Team and Information System (MIS)
Excluding yourself, how strong is your existing management team? Is it strong enough to stay in place and be able to run the business when you are gone? How strong is the relationship between your management team and suppliers, clients, and employees? Does it consist of young blood that a strategic buyer can expect to develop to improve processes and assets in the future? A strategic buyer will be considering these questions when reviewing the strength of your existing management team when determining if they want to buy, as well as how much your company is worth.
Similarly, how effective is your MIS? Even though a strategic buyer might replace it with something they prefer or are using elsewhere, the lack of a state-of-the-art MIS is usually an indication that you don’t have all of the management tools you need to run your business in its most profitable manner.
5. Strength of Sales Team
Strategic buyers will look at the professionalism and turnover of your sales team. Lower turnover will give them more confidence in the continuity and accuracy of sales projections. Again, they will also look at how dependent your company’s sales are directly on you as the owner. The less dependent sales are on you, the higher they will value your business.