As a business brokerage with decades of experience and hundreds of businesses sold, we have seen it all as it pertains to mergers and acquisitions. We have seen a countless number of companies sell effortlessly, fielding multiple competitive offers and ultimately accepting a deal far above what was considered fair market value. So, what made these businesses sellable? In this review, we take a close look at the keys to making your company more sellable (and what often holds companies back from selling).
What are The Keys to Making a Business Sellable?
Ultimately, the market (i.e. the potential buyers) are the ones who decide how much worth your company has. In other words, the amount they are willing to pay is your company’s worth. Of course, a strong marketing plan can help ensure you receive full value and may drive the price higher than what would be considered “fair market value.” Nevertheless, you should always focus on the areas that are the most important for potential buyers. In our experience, the areas that are the most important to potential buyers are:
- The quality of your workforce
- The profitability of your company
- The diversity of your customer concentration
1. A Quality Team of Employees That Can Run Daily Operations
Many owners are heavily involved with their company. To a large extent, this is understandable. After all, it is their company and they want to see it succeed. As a result, they involve themselves in every part of the company’s operations. However, this is not a good business model if you intend to sell in the near future.
Prospective buyers want to know that the company they purchase can operate without major involvement from ownership. Otherwise, the business could decline quickly once there is a change in ownership. This is important to understand. If you are heavily involved in your company’s operations to the point where the company cannot operate in the same manner without you, then it is time to empower your employees more and take a step back yourself.
So, what does a high-quality, empowered team of employees look like? Here are several key goals to establish for your workforce if you are considering a sale in the near future.
- A strong workplace infrastructure – You should seek to establish a team of employees with clearly defined roles, all of which who play a unique and integral role in daily business operations
- Employees who can run the company on their own – Ask yourself this question: if you were to step away from your company and turn your phone off for a week, how would the business do without you? Ideally, the company should operate the same as it would with you there. Rather than playing an integral role in daily operations, potential buyers are more interested in companies where the owner is more of a manager, rather than someone who runs daily operations themselves
2. A Profitable Company With Strong Financial Documentation
This one may seem obvious. However, far too many owners attempt to sell before they are profitable. Although your company may be well-positioned to generate profit in the future, a buyer is not likely to take your word for it unless you can show profit in previous years.
Of course, financial considerations such as minimizing your tax obligations are helpful, but you must also be able to show a positive bottom line. Otherwise, you risk receiving valuations and offers far below what your company has the potential to be worth in a few years once you are profitable. Additionally, it helps to show your profits with well-organized and detailed financial reports. Notably, these reports include your:
- Federal tax returns (3+ years)
- Profit and loss statements (3+ years)
- Cash flow statements (3+ years)
- Balance sheets (3+ years)
Financial considerations such as your working capital, the amount you pay your employees, payments for materials and supplies, and the amount you pay yourself annually all factor into the worth (and ability to sell) your company as well. You may benefit from having an internal (or outsourced) accountant and/or chief financial officer (CFO).
In summary, the simple fact of the matter is companies who sell for optimal value have profits. There is a misconception that companies can sell for a substantial amount if they have not yet generated an annual profit. This is simply not the case. However, if you can show a profit for the past three years with organized financial documents and have growth potential, then you are setting yourself up from a fair amount of interest from potential buyers.
3. A Diverse Customer Base With a Variety of Customer Segments
This is another trend among companies who sell for fair market value without long wait times on market or much compromise on behalf of the seller. Ideally, you want to show potential buyers that you have more than one primary customer. This provides more certainty and less risk for potential buyers. If you only have one primary customer, meaning one of your customers makes up more than 50% of your profits, then it could spell trouble if that customer were to stop purchasing your goods or services.
Instead, you should be able to show multiple customers, which helps minimize risk and provides more financial certainty for potential buyers. It is also valuable if you have customers in different segments. For example, an electrical company owner that works with residential, industrial, and commercial clients is generally more valuable than one who only specializes in residential repair projects. If you only have a few customers that make up the majority of your profit, then you will need to show potential buyers that they are stable and not going to leave in the foreseeable future.
Find Out The Value of Your Company With a Free Business Valuation
Are you interested in selling your company or simply want to know the worth of your company if it were to hit the market? Sigma Mergers can help. We offer no-cost and no-obligation business valuations. This determines how much a prospective buyer that is fair and reasonable will pay to acquire your company. We also offer a complete list of business brokerage services to assist you through the sale journey. Contact us today to get started.