If you have decided to sell your business, or at least are considering it, you are most likely interested in whether there will be a buyer for it, and if so, on what terms. Some companies are more liquid than others, and some companies pay more than others. In this article, we will take a closer look at what makes a company attractive in the eyes of buyers and what can have the opposite effect.
Why would a buyer want to buy your business?How attractive your company is and under what conditions it changes hands depends largely on why a potential buyer wants to acquire your company.
GrowthIn most cases, the buyer is an existing company in the same or at least a similar field, thus being your direct or indirect competitor. In this case, acquiring your company is the fastest way to grow exponentially and increase one's market share. This does not always mean taking over the cost structure of the purchased company (for example, management services, office and warehouse space are already available, etc.), which makes the acquired business more profitable and is therefore an attractive investment for the buyer.
Compensating for what is missingIn addition to the aforementioned growth, your competitors may be interested in your business for a few more specific reasons. This could include your exclusive contracts with customers and/or partners, skilled labor, specific equipment, or company-owned real estate. By acquiring your company, a competitor can therefore compensate for a resource it lacks that would otherwise be difficult, expensive, time-consuming or impossible to acquire.
A critical link in the supply chainIn addition to your competitors, your partners may also be interested in buying your business. For example, if your company plays a critical and indispensable role for someone in a supply chain, your partner may be interested in buying your company to secure greater control over the entire chain. It is common, for example, to buy a subcontractor, whose production quality and reliability of supply affects the partner's entire business.
InvestmentAs a rule, the buyer is an experienced entrepreneur in the given field, but not always. For a buyer, acquiring your business can also simply be a good opportunity to put their idle cash to generate income. In such transactions, it is critical that the change of ownership does not negatively impact business operations. It is important for a potential buyer to maintain the necessary competencies and resources in the company. If the business activity of the company being sold is very directly dependent on its former owner (relationships, knowledge, etc.), the acquisition of the company is more risky for the investor and the price paid for the company will be lower.
What can be sold
ProfitWhen selling a business, its health is generally critical. The exception is if the potential buyer is interested in acquiring your company for some other reason (see the previous chapter). A viable and steadily profitable company is both a good investment opportunity and the fastest way for competitors and partners to expand their business. You should take into account the fact that a potential buyer often uses his own business model and criteria when evaluating the profitability of your company's business. As a trivial example, the profitability of the purchased business will decrease if the management fees (at the market price) were not paid until now. However, profitability increases if, until now, unreasonably expensive vehicles, which are not needed from the point of view of business operations, were leased, and this cost can be waived.
CustomersMaybe your company has loyal and profitable customers that every one of your competitors would love to have? Perhaps you have exclusive contracts with clients? If so, the customer portfolio can become one of your most important points when negotiating a sales deal. Also, the buyer may see unrealized potential in your customers today. For example, if a buyer acquires your company in order to expand its market share, your customer base may offer them new opportunities to "open the door" to their products and/or services.
SuppliersLike customers, a company can be made more valuable by its suppliers. For example, if you are the sole local distributor of a well-known brand, your competitor may consider acquiring your business precisely because of this exclusivity.
Fixed assetsWhen selling a company, its rare or otherwise valuable fixed assets can be a strong argument. If the main activity of the company requires the possession of some specific and expensive machines, the purchase of the entire company may turn out to be a more reasonable step in the long run than the purchase of a specific device separately. The crisis caused by coronavirus also highlighted the problem of availability, where the necessary equipment could not be obtained due to supply chain problems.
Labor forceWhen running a business, labor-related issues are certainly one of the most complex and multifaceted. Therefore, having people working in your company with either highly valued experience or industry-specific skills that are difficult to find in the market can be a critical reason for a buyer to buy the business.
You can read more about how labor affects the value of a company in our previous article: Factors affecting the value of a company.
What is difficult to sell?
A company dependent on the ownerA business that survives only because of the owner's personality is a very high risk for a potential buyer. This means that when the owner leaves the company, also critical know-how leaves with them, business relationships suffer, or some other link necessary for the day-to-day operation of the company is broken, things are bad. The buyer wants a situation where, after the change of the company's owner, the company's activities can continue at least at the same level. Therefore, if you recognize yourself reading this paragraph, you should think about how to reduce your role in the company before selling. Otherwise, the number of interested parties may be very small when selling the company.
Outdated business modelTimes are changing, and customer expectations are changing with it. If the demand for your product or service is in a steady downward trend year after year across the industry, the buyer may not see growth or profit opportunities in acquiring your business. So think today how the service or product offered by your company would be at least as attractive to customers in the future.
DreamsYou have to dream big, but the buyer is primarily interested in the results achieved to date, not theoretically achievable goals in the future. It is true that today people are willing to pay more for a company with high growth potential, but even these assumptions for the future must also be based on real results. On paper, the business model may work flawlessly and generate increasing profits year after year, but in addition to theory, this model must also be validated in a real business environment.
What isn't saleable
UnprofitabilityIf the company's financial results (mainly turnover and operating profit) have been in a continuous downward trend, and there is no sign that they will recover in the near future, it is premature to expect someone else to take over these concerns. Of course, the economic cycle and other things happening in the business environment also play a role here, but if your company is lagging behind (especially compared to the sector), the health of the company should be fixed first when planning a sale.
In addition to the above, there are certainly other aspects that make your company more or less salable in the eyes of buyers. In addition, it must be taken into account that every company is different and generalizations only apply to it to a certain extent. You always have to start from a specific company.
If you are interested in selling your business and would like to consult on this matter, please don't hesitate to contact us.