Helpful Business Practices
Of course, there are aspects of a business that make them more attractive to potential buyers. Some of these are related to their industry and some are the results of their management’s operational decisions. The Montana Group (www.montanagroup.com) will promote the positive and be prepared to discuss the negative in a manner that will ease the potential buyers’ concern.
Management: Once the owner sells the business, the issue then is who will continue the business as it has operated and even take the business to greater heights. If the owner elects to stay involved with the business for a period of a few years this allows the next operational chief to be developed from within or hired and trained from a new hire. If the owner wants to depart at closing and there is no one to take over this presents a problem which is best solved by selling to a strategic buyer, a company currently within the industry who can blend the newly acquired company’s operation into their existing company.
Customer Concentration: A potential buyer is concerned when a company has a significant percentage of their business with one or a few customers. If one or more of these customers were lost there would be a significant drop in sales, which could have the same affect on earnings. If there is a reason that these significant customers cannot move their business (e.g. product or service not offered elsewhere, long-term contract, geographic related constraints) this needs to be emphasized.
Margins: When gross margins are low it appears that the driving force is pricing pressure from competition. When these margins are high it is normally due to a the uniqueness of the product, lack of competition, or the value added component which separates the product from the usual price only factor commodity definition.
Real Estate: If the real estate used in the business is not owned by the company a lease to continue the business at the same rent as is on the financial statements is necessary.
Barrier to Entry: If it is difficult to enter the business as competition then the buyer feels comfortable going forward with the issue of retaining and growing market share.
Growth Opportunities: A purchaser is interested in where a business has been historically, which affects the valuation and where the business will be in the future, which affects their interest in making the purchase. Therefore, significant growth opportunities (either industry expansion or market share growth) of the business are crucial.
While these business characteristics are indeed desirable they are not absolutely required for the business to be sold. A successful and seasoned consultant will work within whatever parameters their client provides.