Buying a Business: Through the Eyes of a Buyer Part II

In today’s post, we’re continuing our deep dive into the business sale process and looking at your business through the eyes of a buyer. We’ve already looked at how buyers perceive things like your attitude, expectations, sales, and marketing. But what does the buyer see when they look at your clientele? How do vendor relationships shape their view of your business? What can they learn from your employee teams? You can help facilitate a successful sale by understanding what the buyer is looking at when buying a business. Join me as I explore your clients, vendors, and teams through the buyer’s eyes.

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TOPIC INDEX:

• – The Business Sale Process Through the Eyes of a Buyer, Part 2: Clients, Vendors, and Teams – Oh My!
• – Your Customer Mix
• – Customer Relationships
• – Vendors
• – The Quality of the Goods that You are Using
• – Employee Teams
• – Compensation
• – Development Programs
• – Wrap Up

What the Buyer Sees When Buying a Business

As business owners, it can be difficult to consider the business sale process from the other side of the table. You’re often so invested in your business that you lose objectivity. Although I’m sure your business is great, you can help the process along by considering what the buyer sees when buying a business before you go to market. If you look at your business from their perspective, you can identify areas that might raise red flags for the buyer. In the process, you could position your business to be more attractive to prospective buyers while positively affecting its intrinsic value for yourself. So, what does a potential buyer look for when they’re examining your clients, vendors, and teams?

Your Clientele

One of the first things buyers look for in a business is the customer mix. Specifically, they’re going to determine what percentage of your revenue comes from each client. If you have a single client accounting for more than 10% of your company’s total revenues drastically increases its risk profile, making it less attractive to a buyer.

Not far from my home, there’s a small strip mall with a Dunkin’ Donuts as its “anchor” (the shop that attracts consumers to the area) store. In the same shopping center, there’s a small finance company. Similarly, there is a small, local restaurant, and a hair salon. None of these places are nationally recognizable storefronts, but they’re all being anchored by Dunkin’ Donuts. So, what would happen to this small strip center if Dunkin’ Donuts suddenly left? It probably wouldn’t be good for the remaining businesses or the owner of the strip center. Their revenues would likely take a major hit. 

We see the same thing in business with the 80/20 rule. Basically, this is the idea that 80% of your revenue comes from 20% of your customers. Where this becomes a problem is when one client makes up 10% or more of your total revenue. A buyer will look at this and perceive an increased risk. Remember, as company-specific risk is increased, value is decreased. Therefore, the ideal client mix is one that is diversified in a way that you’re not dependent on a single client (or a small group of clients) to drive revenue to the company.

Additional Clientele Considerations

Beyond the client mix, potential buyers will look at whether your clientele is made up of individual consumers, retailers, or large corporations? How long have they been clients? Are you consistently adding new clients? Does your business suffer from attrition? I recently spoke with a medical entrepreneur who was experiencing a lot of patient attrition. He was losing a lot of patients out the back door, as it’s referred to, but he was also gaining a lot of new patients through the front door. This was an unusual circumstance for his field. However, when it became time to go to market, his value was penalized because of the rate of attrition.

Similarly, buyers will often examine your customer relationships. Have you fostered and developed long-term relationships with your clientele? If you’re wondering why that’s important, here’s an example from my personal experience. I’ve got several clients who have been with me for 20 years or more. If there’s a mistake or a miscommunication, I don’t have to worry about them leaving the client pool because we have a relationship built on trust. On the other hand, if there were a similar problem with a new client, they may be more inclined to leave. 

Additionally, potential buyers are going to want to know that the customers will stay with the business if you are no longer a part of it. Think about it. Let’s assume you’re buying a business for X number of dollars based on Y revenue that’s been coming in for Z number of years. As a buyer, you’re going to want to forecast that the clientele will springboard you into a period of growth, or at least to maintain the company’s current position. The more continuity that’s built into the processes of the business, the greater value it has.

Vendor Relations

It may be surprising to learn that many buyers want to know about a company’s vendors. Are you locked in with a single vendor? When I owned my landscaping business, I had a big job valued at around $200K. It was a big contract. We were planting 4″ oak trees and 6″ magnolias that went into holes that were 4 to 6 feet deep. You needed special equipment just to move them around. At that time, I had one landscape nursery that I bought plants from and, usually, they could suit my needs with no problem. Not this time. As a result, I was forced to rush out to a different supplier and purchase the plants I needed at a premium because I wasn’t as competitive in my pricing as I could have been with multiple vendors.

So prospective buyers will ask many questions about your vendors. Try asking yourself some of these questions before going to market. Have you recently negotiated your vendor agreements? Is there some room to create a little more margin in the business? Is there one single touchpoint for your industry? Do you have solutions for scalability? What happens if you run into supply chain issues? By working with a group of vendors, you can mitigate risk to your business operations through having multiple avenues to receive products. Likewise, you may be able to negotiate better pricing by having multiple vendors compete with one another.

Additional Supply Issues the Buyer Considers When Buying a Business

In addition to looking at your vendor mix, relations, pricing, contracts, and agreements, buyers look at the quality of products you’re receiving. I work with a lot of dentists and auto repair shops. In both of these industries, there are superior, adequate, and inferior supplies. For example, you can purchase a superior crown that handles greater bite pressure and has better chip resistance than others like it. The same is true of certain brands of auto parts. Likewise, the same can be said of many industries.

So, when a buyer is looking at your vendor mix, they’re probably looking to see the type of quality you’re providing your clientele. But why? Well, if you use subquality parts for your work, the buyer could be in store for some major quality control issues. Once again, this boils down to risk. They don’t want to be stuck having to repair or replace poor-quality products.

Your Employee Teams

I am passionate about the employee teams that work with you. Notice I said with and not for. I’m not crazy about the dictatorial style of, “I’m the boss, so do what I say!” Your team can have such an influence on your success. Great teams add value to your business and make it more attractive to prospective buyers. Therefore, I like to treat them as the valuable team members they are. Because they’re so valuable, buyers definitely want to examine your teams.

One of the first questions they will ask is, do you have enough employees to do the work? If you don’t, you’re probably overworking your team. This is important because the transition is going to add some pressure. If they’re already overworked, there could be some attrition. The next thing the buyer will look at is whether you’re compensating your team, competitively. There’s a fine line when it comes to paying top-tier compensation to your team. You want to pay them enough to be a desirable place to work while not diminishing the value of your business by overpaying them.

Overpaying your team creates entitlement. If a team member is being paid above market value, they’re not going to be driven to work as hard for what they have. Strong employees may also be tempted to leave if they see others receiving higher compensation without deserving it. On the other hand, underpaying your team could raise a red flag for the buyer. They may see that and realize they will need to increase employee compensation, negatively impacting EBITDA. The same is true of your company’s benefits package.

Additional Employee Issues

How are your company’s onboarding processes? Is there an effective training and development program in place? Are new hires put through a robust training process, placing them on the path to success? Buyers are drawn to businesses that develop leadership, providing clear pathways for their teams to empower them to accomplish the company’s mission. In fact, buyers are often willing to pay a little more for businesses that excel in this regard.

Beyond this, great employee relations are pivotal to a buyer’s perception of your business. But why? If you have a great relationship with your team, they’re more likely to survive the merger, sale, growth, contraction, or anything your business is facing. Similarly, a positive and longstanding relationship with your industry’s labor union will allow the buyer to attract top-quality talent. 

Wrapping Up…

As you look at your business through the buyer’s eyes, remember that your customers, vendors, and employees matter. How the buyer views each of these important groups is vital to the success of the business sale process. Friends, I know life is tough, but the sun is still shining and there’s always a reason to be thankful. Life is good. Selling a business is frustrating. But looking at it from the buyer’s perspective can make it at least financially simple.

How do your clients, vendors, and team members hold up to the buyer’s gaze? Do you still have some work to do before going to market? Reach out to us. Our team is always here to help!