Buying a Business: Through the Eyes of a Buyer Part II
March 29, 2022The Business Sale: Roadblocks to Closing
April 19, 2022Selling a Business: Through the Eyes – The Assets
Over the past year, I’ve spoken with many business owners who are in the process of selling their companies. Some have been better prepared than others. One thing I’ve noticed about those business owners is that they were truly prepared for the scrutiny that comes with the business sale process. Therefore, as we continue looking at your business through the eyes of a buyer, we’re going to shift our attention to assets, technology, and risk management. How do these areas influence the way a buyer views your company? When selling a business, what can you do to improve these areas in a way that makes them more attractive to buyers and investors?
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TOPIC INDEX:
- – The Business Sale Process Through the Eyes of a Buyer, Part 3: The Business’s Assets
- – Facilities
- – Location
- – Fixed Assets
- – Technologies
- – Digital Footprint
- – Risk Mitigation and Management
- – Taxes
- – Environmental Regulations and OSHA
- – Insurance and Intangible Property Protection
Selling a Business with the Buyer in Mind
Most business owners understand that potential buyers and investors will explore their financials and operations during the due diligence period. However, some are surprised by the intense level of scrutiny. As you read through this series, take the opportunity to be proactive and examine your own business. Whether you’re in the midst of selling a business or still years away, knowing what buyers look for could help you prepare your company for a seamless transition.
That’s why exit planning is so important. You must start your business with the end in mind. As you work on your business, each step should serve to improve it and prepare it for an eventual transfer. An added bonus is that, while you’re making your business more attractive to prospective buyers, you’re likely increasing its intrinsic value as well. It’s the ultimate “two birds, one stone” situation. This is what I mean when I say, “you’re selling a business with the buyer in mind.”
So, if you’ve read the previous entries in this series, you know the buyer will examine you. They want to know who you are, your motivation for selling, your attitude and expectations, and whether you’ve properly decentralized yourself from the business. Likewise, buyers will thoroughly examine your clientele, vendors, and your employee teams. But as we wrap things up, there are still a few areas of concern. Primarily, what do buyers look for when they examine your business’s assets, technologies, and risk management practices? Let’s dig in.
The Business’s Assets
Typically, when you think of business assets, you’re thinking of the balance statements, equipment inventories, etc. However, I want to go beyond the academic sense of the word. I’d like to move past what your accountant, negotiator, or broker would look at. Therefore, we’re going to start with your business facilities. But even here, we’re going beyond simple curb appeal. You want your business to look good. After all, having a presentable storefront is one way you market to the public. But when the buyer comes to look at your business, they will absolutely go beyond the fresh paint and landscaping. So, what are they looking at?
Potential buyers love a clean and attractive business facility. However, they really want to know if your building meets state and local requirements. They want to know if it’s functional or if it can be expanded to serve additional clientele. Likewise, they’re interested in the maintenance schedule. Have you kept up with regular required maintenance or has the building fallen into disrepair? Additionally, potential buyers will want to know if you own or lease your building. If you lease, they’ll be interested in the terms of the lease. If you’re the owner, are you willing to sell the building?
Perhaps, most importantly, buyers are interested in the location of your business. I know it’s cliché but the old real estate adage, “location, location, location,” still rings true. You see, location affects the cost of living, vendor and client access, transportation, and the availability of skilled labor in the area. But what about the business’s fixed assets?
Fixed Assets Under the Buyer’s Microscope
In my latest book, Your Baby’s Ugly, I talk about the tale of two companies. These are two very similar businesses, sharing nearly identical revenues and locations while operating in the same Standard Industrial Classification (SIC) code. Now, Company A has dated equipment, poorly maintained buildings, and a rundown fleet of vehicles. On the other hand, Company B has well-maintained vehicles, a building that is cared for and up-to-date, and state-of-the-art equipment. Which business would you want to buy?
Company B indicates that its owner takes pride in the business and focuses on the company as a whole. Meanwhile, Company A is indicative of an owner who is solely focused on the bottom line. It’s the difference between having a company that’s valuable vs. one that’s profitable. The two aren’t mutually exclusive as long as you’re prioritizing them in the correct order.
Therefore, if you’re selling a business with the buyer in mind, think about the potential value that could be gained or lost by neglecting or overlooking your fixed assets.
Your Business Technologies
Aside from stability, continuity, and profitability, buyers want up-to-date technology. Depending on the type of business you’re operating, buyers could want to see that your computers are up to date. Think about it. If your business relies on the use of computers for its daily operations and you’ve got a room full of Commodore 64s, buyers are going to be turned off. They will look at that and see a liability to the business operations and an expensive upgrade. If they’re still interested in buying your business, they will probably expect to take the cost of those upgrades out of the sale price.
Similarly, buyers want to see that you have state-of-the-art software. Oftentimes, buyers choose to invest in technologies that give them a critical advantage over competitors. This includes buying businesses to gain access to their proprietary systems and software. Therefore, if you’ve got state-of-the-art, proprietary software, and technologies, your business could be more attractive to prospective buyers.
In addition to these, buyers will often look at your digital footprint. Do you have a website? If not, you should consider changing that. Websites are considered assets and, as such, they do appear on your balance sheet. But simply having a website isn’t enough. It must be functional as well. Does it direct visitors to the services you most want to sell? Are visitors encouraged to check back frequently? Does it look like and function as though it belongs to a company you would want to buy? These are all considerations a buyer will make when examining your business’s technologies.
Risk Management Through the Eyes of a Buyer
One of the first areas of risk mitigation that a buyer will examine is whether there are significant barriers to entry in your field. When I first began my landscaping business, my mom would drive me and my brother around to each job site. We were able to steal a significant amount of business from some of the larger landscaping companies because we did good work and didn’t carry the same level of overhead. Therefore, we were able to enter the field by offering lower prices than our competitors. A low barrier to entry presents a greater risk to the buyer. As a result, a higher barrier to entry yields a higher price for the business.
Similarly, buyers want to know your company’s history of litigation. If there is a history, what were the rulings? What was the nature of the lawsuit? Are you currently in the midst of a lawsuit? Buyers aren’t interested in buying a lawsuit. Therefore, attempting to sell in the midst of a lawsuit may present some challenges. However, if your company has handled itself well during litigious matters, it may not be a dealbreaker. The buyer will also want to see that your attorneys have reviewed your contracts, ensuring they’re up to date and won’t cause issues further down the road.
Taxes are another area that buyers are interested in. They are looking to see that you are current with all of your federal, state, and local taxes. I once purchased a company where the sellers hadn’t paid the payroll taxes from their last payroll. I found out when I received a fine from the state. It was purely accidental on their part, and they gave me the money to pay the taxes when I brought it to their attention. However, this is something buyers are often looking for.
Environmental Regulations and OSHA
Some industries have to deal with Environmental Protection Agency (EPA) regulations and compliance. I once had a client who purchased a gas station (we really tried to convince him that it was a bad idea) and the EPA came in saying they were going to shut him down if he didn’t replace the fuel tanks because they were found to be leaking. Therefore, a savvy buyer is going to want to see the results of past inspections. They might also want to know if you have a dedicated person handling the company’s compliance.
Similarly, buyers want to make sure that you’re in good standing with OSHA. Have you ever been fined or penalized? Do you regularly check that you’re within all of OSHA’s workplace safety guidelines? These things are very important to potential buyers because failure to comply presents enormous levels of risk to the company. This could include litigation, fines, closures, and could even tarnish the public image of the business.
Finally, buyers are going to look at your insurance coverages and protections for your intellectual properties. I can actually look at a business owner’s insurance portfolio and, almost immediately, determine if the business is a sellable asset. You see, if you’re underinsured, it’s likely that you aren’t as risk-averse as you should be. On the other hand, adequate coverage indicates that the business owner has at least done the basics to make sure the business can withstand whatever comes at it.
Wrapping Up…
Folks, there you have it. While this may not be an exhaustive list, you now have a deeper understanding of what’s going on in the mind of a potential buyer. With this insight, you should be able to view your business as they would, allowing you to strengthen any weak points before you come to the table.
Friends, life is hard. I get it. But life is good. Selling a business isn’t for the faint of heart. It can be frustrating. But by looking through the eyes of a buyer, you can make it at least, financially simple. Let’s go out and make it a great day!
Are you now realizing that you’ve got some work to do? Reach out to us. Our team can help you create a plan to make your business more attractive to potential buyers.