Many businesses fall short of their potential valuation or maximum sale price. While there is no such thing as a perfect business without flaws or challenges, the businesses which sell at the top of the valuation range or command the highest multiple embody several common characteristics.
Characteristics of a Successful Business – M&A Transactions
1. Increasing revenue/profits. Cash is the fuel of business. Businesses that have strong financials with year-over-year growth in revenue and profits will be in demand and should achieve an attractive valuation.
2. Clean Books. Having accurate, detailed, up-to-date, and professionally prepared financial statements and records is one of the most critical components to a successful business sale.
3. Bright prospects for the future. Businesses that operate in an industry that has a strong outlook for continued growth in the years ahead will be highly sought after.
4. No customer concentration. A business that has a diverse and broad customer base will have a lower risk that the loss of anyone customer will have a material impact on the revenue and profits of the business.
5. Multiple vendors. Companies with a diversified product and/or service offering with a deep bench of suppliers and partners will be a less risky acquisition than a company that is dependent on only one manufacturer or service provider to generate income.
6. Stable workforce. Having a loyal and content workforce with long-term employees is always a positive attribute for a buyer seeking to acquire a privately held business.
7. Established Processes. A business that has written procedures detailing workflow and operational processes provides greater continuity during a business transfer of ownership.
8. Owner not the business. Companies, where the owner lends their expertise by working “on” the business vs. “in” the business, are less likely to experience a loss of revenue during a sale. Owners who have become the face of the business where they are one of the chief reasons for customers using their products or services create challenges for the new owner in retaining these loyal clients.
9. Business qualifies for acquisition funding. A business for sale that meets the qualifications for acquisition funding by a bank or SBA-backed lender will benefit from its ability to be marketed to a wider audience. Certain issues prevent 3rd party financing from being secured including poor financial performance or messy books with unreported cash and questionable add-backs.
10. Professional Advisors. Successful business sales require a team of professional advisors who are experts in their designated field. Members should include an experienced M&A advisor or business broker, a business attorney who specializes in transactions, and a CPA knowledgeable about tax structuring and asset allocation. Experienced advisors are worth their weight in gold and will add value that far exceeds the fees involved.
Small business ownership involves some level of risk. The price a business is valued at should reflect the degree of risk. While the element of risk can never be eliminated from small business ownership, the ten characteristics detailed above should mitigate many of the issues that cause concern for buyers when pursuing an acquisition. This in turn will enable the business value and sale price to be maximized.