Selling a Business
How marketable is your business?
There are many factors that determine the marketability of a particular business. Some are discussed below. It’s important to think about who a likely buyer would be. If it’s a competitor, the biggest issues will be revenue, market share, and gross margins. If it’s an owner/operator (ie. someone looking to buy an opportunity), the biggest concerns will be whether the buyer can earn a living from the business, reinvest in the business’s growth, make the payments on any borrowed money, and make a return on money invested.
COMPLETE DOCUMENTATION OF FINANCIALS
Buyers today want provable cash flow. A truly marketable business will be capable of providing the following financial records for at least the last 3 years. These records should be complete and reflect the operations of the business being sold and not contain items related to other businesses or activities of the seller.
- Federal Tax Returns
- Incomes Statement
- Balance Sheets
- Sales Tax Returns
- Payroll Records
REASON THE BUSINESS IS FOR SALE
One of the first questions buyers ask is "Why is the business for sale?". For most sellers there are multiple reasons for a sale, often personal and unrelated to the business operations.
OPPORTUNITY FOR IMPROVEMENT
Many business buyers look for operations that they can improve through their own expertise and hard work or through synergies that may exist with other businesses or activities.
QUALITY AND QUANTITY OF THE REVENUE STREAM
Buyers tend to look for operations with adequate revenues to support the expenses of the business plus the ability to provide a living for the owner/operator and a return on the purchase price (or to cover the payments on borrowed money). Recurring revenue, such as from longer-term contracts, is generally more attractive than from one-time sales. A steadily increasing revenue adds to the marketability of a business and is a good indicator of business success.
CONTINUITY OF OWNERSHIP
This is related to the quality of the revenue stream discusses above. A business that has survived and thrived for many years is perceived to be, and usually actually is, much less risky than one recently started without much operating history.
EXISTING MANAGEMENT AND PERSONNEL
Having good people in place is very important. Many buyers look to key employees as very important to their transition to ownership. Poor morale and inattentive workers are negative factors that jeopardize deals.
CONDITION OF PREMISES
The condition of the operation is extremely important, especially if the business deals directly with the public. A neglected facility is a frequent reason why buyers walk away from transactions or make offers significantly lower than the asking price.
What is a “favorable” lease is often in the eye of the beholder. For businesses where location is important, like retail shops and restaurants, a buyer will look for the ability to control the space either through a long lease or through lease renewal options. For other businesses, where a buyer may want to relocate or expand, a short lease can give the buyer flexibility. Sometimes the real estate can be acquired with the business which expands financing opportunities for the buyer or how the deal can be structured for the seller.
The pricing of a business for sale is the single most important factor determining whether or not it sells. Regardless of how well positioned a business may be relative to the other factors we have mentioned, an overpriced business will often remain on the market for a very long period of time, receiving minimal buyer attention.
TERMS OF SALE
Other than pricing, the terms of sale are the most critical component determining the marketability of a business. One of the most important is the ability and/or willingness of the seller to finance part of the purchase price. For businesses that are incapable of producing complete financial documentation, sellers should expect to finance a substantial part of the purchase price.