Listing in Buyer’s View
What are Buyers Looking For in a Business?
“I’m selling my business and I don’t know where to start!” – this is a common phrase heard often by business brokers. Selling your business does not have to be complicated but it is a process that is unique and one that most business owners don’t have much experience with.
What Buyers Want in a Business
Business buyers are a fickle bunch. Most of them (some say as many as 90%) will never actually buy a business. The role of the business broker is to qualify the serious business buyers from those that are “window shopping”. This is a critical role that a business brokerage plays. The focus of this article is to examine some key elements that most “serious” business buyers look for in a business for sale.
Historic cash flow
There is an expression that says “cash is king”. This is a very true statement if you are considering selling a business. Buyers are very interested in businesses that have a strong track record of historic earnings and cash flow. If you are a business owner thinking of an exit plan for your company, take a look at the past two to three years of your business’s financials. Determine what the cash flow is. If you need help, talk to your accountant or business broker for assistance. It is very difficult to sell a business that is losing money or one that is only marginally profitable. Too often, business brokers hear that an owner wants to “sell my business – but it has potential”. Potential is great, but there must also be cash flow.
Is the cash flow sustainable?
A buyer is not only interested in how much historic cash flow a business generates, but is more so interested if the business earnings are sustainable. A business buyer will be interested in a business that has an excellent earnings history only if he or she believes that they can buy the business and not have the earnings evaporate once the sale closes. If you own a business where the entire operation hinges on you being there – then this is a difficult type of business to sell. If you own a business where you can successfully train and transition a new owner with little disruption to the customers or earnings – these are the types of businesses that get sold more quickly.
Is the business priced right?
If a business has strong historic earnings, sustainable cash flow and is easy to transition – but is not priced properly – then the business will be difficult to sell. Getting the valuation (or listing price) correct for a business sale is critical. Example – if you own a small business that generates $75,000 in earnings every year to an owner/operator and you expect to ask a $1,000,000 price for the business, this will be extremely difficult, if not impossible, to sell. Consider that most small businesses are currently valued at 2-3x ‘seller’s discretionary cash flow’ when you think about a selling price. If you need help, talk to a business broker or a business Appraiser (Evaluator) to assist you. If you are serious about selling your business please be realistic about the asking price.
Don’t approach a Realtor with “I’m thinking of selling my business. It earns me about $50,000 every year but it has potential, so I’d like to ask half-a-million dollars for it”. Potential needs to be a given during a business sale. Buyers expect potential. If there is none, then it will be very difficult to sell your business. If that is all you are offering though, you need to re-examine your sales strategy very closely. Buyers will naturally ask if there is so much potential in the business why haven’t you done anything with it yet. This is a very important point.
Please contact Vijay Gandhi at (647)267-6338 for a confidential consultation to determine the best of your business.
Serving the Greater Toronto Area & southern Ontario-Golden Horse Shoe.