Mapping Your Business’ Process of Selling – Decentralizing
March 1, 2022Buying a Business: Through the Eyes of a Buyer Part II
March 29, 2022The Business Sale Process: Through the Eyes of a Buyer
The business sale process is much more complex than simply deciding to sell, finding a buyer, and closing the deal. Oftentimes, buyers will spend months or even years researching before making the decision to buy a particular business. But what do they see when they look at your business? What can you do to make it as attractive as possible to prospective buyers? Understanding how you and your business are perceived by a potential buyer could help you prepare for a more efficient exit. Over the next few blogs, we’re going to explore the business sale process through the eyes of a buyer.
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TOPIC INDEX:
- – Through the Eyes of a Buyer, Part 1: The Owner
- – Motivation
- – Attitude
- – Expectations
- – Decentralization
- – Wrap Up
What The Buyer Sees in the Business Sale Process
During Q4 of last year, we saw many clients entering into the business sale process. Some of them successfully closed the deal while others learned that potential buyers see their businesses in a very different light. As many of you know, I recently published a book on this very subject. In Your Baby’s Ugly, I deal with the hard fact that your business often isn’t as attractive as you think it is. As business owners, there’s a tendency to overvalue your business because you know how much of your blood, sweat, and tears have gone into it. However, if you were to step outside of the business and approach it as though you were about to make an investment, you’d probably begin to notice warts and scars that are evident to anyone taking an objective look.
If you can look at your business as a buyer does, you’re able to work on the areas that require improvement BEFORE you enter the sale process. If you’re able to prepare and improve your business before a buyer begins their due diligence, you could experience a more seamless transfer. But how do you know where to begin? What does the prospective buyer see when they look at your business? Well, they’re going to view your company with a series of questions in mind. Let’s take a look at some of the factors they’ll consider.
What’s the Seller’s Motivation?
One of the first questions that a potential buyer will want to answer is what your motivation to sell is. Will you simply sail off into retirement once the deal is done? Are you staying on as a consultant? Perhaps, you’d like to become an employee of the business? These are the types of questions a buyer might ask themselves as they begin looking at your business. But why does it matter?
The reason a buyer places such importance on your motivation comes down to risk. If they purchase your business and you launch a new company that’s in competition with it, that’s a risk to their long-term success. Likewise, you could position yourself to buy the business back for pennies on the dollar. Once again, that’s a very big risk for the prospective buyer. On the other hand, you might be motivated to sell because you’re nearing retirement or your health is in decline. Maybe you’re experiencing fatigue, coping with a death, or just a lack of capital. Whatever the reason, buyers will always want to know your motivations for selling your business.
So, what can you do to ease their minds? You can start by having a detailed plan for what you’re going to do after the sale. Put it in writing! You didn’t think we’d get through this process without putting a plan to paper, did you? Having a written plan can go a long way in putting the buyer at ease and assuring them you’re committed to the sale. Similarly, you must be prepared to answer questions about the plan. It’s not uncommon for a buyer to want to know details about your plans because they want to see how an exit helps you move toward your plan.
Attitude Matters
The next thing buyers will look at is your attitude — and that of your partners (if you have them) and family. How do you feel about your business? Are you enthusiastic, approaching each day like a fresh, young entrepreneur? Perhaps you’re weathered and exhausted by your business. Does that show in the way you approach it? Think about it. If you’re running around with an air of frustration — if you’re a “Frazzled Frank,” why would anyone want to buy your business, much less, pay you top-dollar for it?
Whether you realize it or not, everything you say or do as you approach a letter of intent (LOI), will be critically assessed by the buyer. It can feel a bit like you’re under the microscope, but it doesn’t have to be a negative experience. If you have prepared for this moment, it should be an exciting time. You see, the buyer is simply measuring your readiness to sell. If you’ve made your baby beautiful and you’re ready to move into the exit phase, it’s going to show in your attitude. However, your family and your partners must also be on board. Therefore, you must meet with them BEFORE you enter the business sale process. Be sure that everyone is on the same page and there should be no cause for concern when the buyer begins assessing the attitudes of everyone involved.
What Are Your Expectations?
Nothing will devastate the value of your company like overoptimism for your business. As entrepreneurs, there’s usually a glass-half-full mindset about the value of your business. To be honest, it’s more like a glass overflowing mindset. I love that about the entrepreneur. Nothing defeats you. That’s why I’ve often said, I’ll bet on the entrepreneur every time. But you have to be realistic when you’re putting a value on your business.
Oftentimes, buyers will look at a number of sales in comparable businesses before coming to you. Therefore, if basic market research indicates that your business is worth $1 million and you’re asking for $2.5 million, you’re probably going to scare buyers away. Take the time to do some research and make an informed and realistic decision when determining your minimum sale price. If you know the intrinsic value of your business is too low for you to accept, take some time to work on growing the value BEFORE you go to market.
You see, you have to plan your exit well in advance. Flying by the seat of your pants doesn’t work when you’re selling a business. Without a well-thought-out and executed exit plan, the likelihood of making the ultimate sale is pretty slim. If you are fortunate enough to sell in this way, you’re probably doing so with major concessions being made. So, friends, working on the 8 key areas of your business to grow its value and having an exit plan in place isn’t really a suggestion. If you’re truly interested in getting top-dollar for your business (and candidly, just being able to sell it), it’s required. But none of this matters if you haven’t achieved my next point.
Decentralization Is Critical to the Business Sale Process
I’m going to say this as plainly as I can. If your business runs through you, you don’t have a business; you have a job. Being at the epicenter of the business opens it up to all kinds of company-specific risks. The buyer wants to purchase a business that will continue to perform after you’ve gone. If you’re the one pulling all of the levers in your daily operation, that suggests the business can’t perform without you. Therefore, it’s critical that you do all you can to remove yourself from the daily operations BEFORE going to market. But how?
First, you must have proven systems and processes in place for all areas of your business. When you have an exact and repeatable process for each task your business performs, you have the beginnings of a scalable business. Once you’ve developed your systems and processes, start handing tasks off to your team. Next, identify your leaders. If you don’t feel confident that someone on your team can successfully manage your daily operations, find someone externally. A highly skilled and proven management team adds value to your business and instills confidence in the buyer that your operations can continue and be built upon.
In addition to their ability to manage the day-to-day operations, buyers are interested in seeing the depth of the management team. What do I mean by that? Well, they want to know the management team is large enough to handle your entire team. Studies indicate the optimal Span of Control is between 5 and 9 direct reports. Therefore, buyers want to make sure your management team isn’t spread too thin to be effective. If you’re reading this and thinking, “Holy cow! I’m still stuck in the center of my business,” start working on updating your organizational chart so you can leave the daily operations to your management team and put them in the best position to succeed.
Other Aspects of Decentralization that Buyers Examine
As you remove yourself from the daily operations of your business, it frees you up to work on your business. As I just mentioned, you could update your organizational chart for maximum efficiency. But it doesn’t end there. Buyers expect your hands to be throughout the business. However, if you become the chief salesperson (as entrepreneurs so often do) or the face of the company, all the buyer sees is an attrition problem. You see, they’re concerned with whether the customers will stay once the relationship with (you) has gone.
In businesses with a more non-traditional client/sales rep relationship, buyers will focus more on how the organization is marketed. Is your marketing directed at your target demographic? How is it tracked? Does your marketing align with your company’s values? They want a business that’s trustworthy in their branding and marketing, and growth-minded in their sales approach. Each of these things are going to be viewed through the lens of decentralization.
Wrapping Up…
As you remove yourself from the center, you want to replace yourself with systems, processes, value alignment, demographic alignment, and growth-minded alignment with the company. Look, buyers want to get the deal done. They really do. There is a lot of opportunity and they want to invest in good businesses. But they’re going to look at you. They’re going to look at your motivation, attitude, expectations, and how well you’ve decentralized yourself from the business. If you’re reading this and realizing you’ve got some work to do still, that’s okay. You may even be thinking that you don’t know where to begin. That’s okay, too. However, if that is you, reach out to us. We do this every day.
Friends, I know life is hard. Business owners have been through the wringer these past couple of years. But life is good. The business sale process can be frustrating, but it doesn’t have to be. By understanding how a buyer looks at your business, you can make the sales process at least financially simple.
Has this given you some food for thought? Reach out to our team. We could help you formulate a plan to prepare you and your business for an eventual sale.