3 Key Factors Buyers Evaluate on Businesses
Performance Business Advisory has had the pleasure of engaging many business owners and
buyers regarding buying and selling businesses. Sure, there are industry multiples, rules of
thumb and valuations for determining a price. But what are the things that a buyer really
evaluates when scanning the business horizon for their next investment? I have narrowed it
down to three fundamental things regardless of price.
The three key factors a savvy buyer evaluates are:
1. Is the business profitable? 2. Will the business run well without the current owner?
3. Are the financial records adequate?
Many business owners get a little nervous showing their financial statements. One of the best
kept tax secrets is owning a business. A well-run business with a good bookkeeper or tax
accountant will show great cash flow and modest profit. Buyers not only understand that fact,
they are attracted to it. There is nothing wrong with showing a net operating loss as long as the
business has strong cash flow. Business owners do not get extra credit for overpaying their
taxes. High debt combined with a net operating loss will chase buyers away.
Business buyers are attracted to businesses that are immune to the owner’s skills. Clearly there
must be basic business management in place. What I’m referring to here is the critical elements
of success must be able to thrive under new ownership. For example, if the owner is successful
due to their active involvement in a key process, buyers will often pass even if they have the
same skill set. Think of it this way. It is the difference between an artist and a painter. Painters
are more about process and can be duplicated. Artists are the brand and take a piece of the
business with them when they leave. One exception here is when a Private Equity entity
assumes ownership and the “artist” remains in place.
In today’s environment with nifty software applications, financial records are typically not an
issue. A simple profit and loss statement combined with tax returns are sufficient in most
situations. If the business offers employee benefits, make sure you check the contract language
to determine if “change of control” creates any lump sum payouts. Buyers want cash flow and
leverage. Paying off key employees can be a deal breaker.
Before you begin the journey of determining the price tag for your business, make sure you
have these three critical components in place. Do not underestimate the time it takes to market
and sell a business. You should begin serious preparation 1-2 years in advance. Buyers always
come to the table with a healthy dose of caution, but the deals that are consummated are inked
with mutual respect between buyer and seller.
Contact us to discuss the selling or buying of a business.
Info@performancebb.ca or 780-756-2990