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Small Business Financial Article

Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Is Your Business Saleable?

Is Your Business Saleable?

As a business owner, the notion of selling your business may not have entered your mind; or, perhaps you started your business with an end game in mind. Either way, if the sale of your business is part of your long-term strategy, it would be a mistake to wait until you think you’re ready to sell to make your business saleable. Selling a business for a successful outcome can be a long and stressful process. The more you can do purely from a standard business management standpoint to make your business saleable, long before you think you’re ready to sell, the easier and more satisfactorily the sales process will be at the time. And that can mean less stress and more money in your pocket later while generating better results now.

In objectively determining the saleability of your business, the key question you have to constantly ask yourself is, “Would I buy this business?” It’s critically important to view your business from the perspective of a buyer, especially if you think your business should garner a premium price. Then your focus should turn to eliminating the negatives while accentuating or enhancing the positives.

Evaluating the Saleability of your Business

Potential buyers may have a number of criteria they include in considering the purchase of a business, but the core elements can be categorized as follows:

  • Profitability
  • Solvency
  • Market position
  • Management/Employees
  • Customers

Profitability

It almost always comes down to the bottom-line. Is your business profitable? Equally important, however, is the multi-year trend going backward and forward. One or two years of profits may not be enough unless the recent trend shows steadily increasing revenue and that there is a realistic forecast of continued growth going forward.

Solvency

Buyers will next want to know how solvent the business is – essentially determining its net worth. Buyers want to know that the business liabilities are exceeded by its assets; and if there are liabilities, they want assurance that the current revenue is sufficient to cover the debt payments while maintaining profitability. The quality of the debt is important as well. Obviously, lines of credit and short-term debt are acceptable, as is a term loan for financing equipment. The key is to be able to match the type of debt and the term to an underlying asset. The bottom-line, however, is the less debt on the books, the better for attracting good buyers.

Market Position

Businesses that have successfully differentiated themselves in the market are especially attractive. A business can establish a strong market position through successful branding, distinct products and services, or innovative operational processes. Buyers consider all of these when determining the market position of the business and its ability to retain or build on it. The other factor to consider is the industry as a whole. Is it a dying industry that no one will find attractive, or is the industry trending upward?

Management/Employees

Business owners know that employees are the backbone of a successful business, and so do prospective buyers. They will typically evaluate the experience and abilities of your employees and management staff. If buyers determine that certain employees will be a drag on the business during or after the transition, they will view it as a cost to the business, which will translate to a lower offering price. For certain key employees the buyers deem as essential, they may want to know that they are “locked in” with a contractual agreement.

A word about nepotism: Buyers don’t automatically view hired family members as a bad thing, as long as their experience and abilities match the criteria established for all employees. However, if your business is riddled with family members, it could be a red flag for a potential buyer.

Customers

Unquestionably, the business’s customers are its most valuable asset. Your customer base – its size, its diversity, its loyalty to the brand (and not you), and its growth potential – is a key determinant in how buyers value your business. Is your customer base diversified among several industries and types of companies, or is it too concentrated, increasing the risk that the loss of one company could severely impact revenue forecasts?

Make Yourself Expendable

One last, but very important factor buyers consider is how expendable you are. Much to the chagrin of some business owners, a business is much more attractive to a buyer when the owner is not an important part of the day-to-day operations. While it might be hard to admit that your business doesn’t need you, the fact is, that by making yourself expendable, your business is more valuable.


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