While many businesses see some level of fluctuation in their net margins from year-to-year, in most well-run businesses gross profit margins (Sales less Cost of Goods Sold) will remain consistent or will gradually increase as supplier volume discounts kick-in or better purchasing or efficiency is gained.  Fluctuating gross margins can signal a variety of possible problems to a buyer including:  1, the business is subject to fluctuations in inventory and other direct costs of producing its product or service, and the business isn’t able to pass along those price increases to its customers; 2,  the business has inconsistent suppliers; 3, the business hasn’t been able to manage wages or production costs efficiently; or 4, the business may be inconsistently reporting expenses where in some years it classifies certain expenses as Cost of Goods Sold and in other years as Sales, General and Administrative expenses. 

There are some legitimate reasons why gross margins could significantly vary which may not be due to problems.  For example, if a company had a significant shift in sales of products or services that have different levels of Cost of Goods Sold it could be a valid reason for a significant shift in overall gross margin.  Yet, even this type of  change may lead to buyer uncertainty because they could view the company as being less stable and certain.

If your company’s gross margins are fluctuating from year-to-year it is something you may want to either resolve prior to selling, or have a good explanation for the fluctuations that won’t cause buyers to perceive more risk.

Businesses that offer a more thoughtful user experience are able to not only differentiate in a way that may attract more customers, but also in a way that may make their business more marketable. Think about some of the large businesses where the customer experience is a significant driver of customer-perceived value: Apple, Four Seasons, Starbucks, Nordstrom, etc. One thing that such businesses have in common is strong attention to how physical design contributes to the user experience. During these times of varying degrees of shut down due to the pandemic, it may provide more time to think about how physical design impacts your business' user experience, and how that may, in turn, contribute to your business' marketability and value. Following is a video from Monocle that provides some inspiration based on how other businesses have thought about design.

I'm frequently asked, "what makes a business attractive to prospective buyers?"  This can depend on a variety of factors, including the objectives of the buyer and whether they are a financial buyer or a strategic buyer, who will gain additional benefits from an acquisition beyond the stand alone performance of the business.   Generally, though, a business will be considered attractive if it has low risk factors, strong financial performance, and good potential for growth. 

Some of the specific things that will tend to make a business attractive to buyers include:

• Recurring, repeat, or strong referral business from stable, diverse clients, with no single client representing more than a small percentage of overall revenue.
• A growing or mature potential customer base.
• Stable and redundant suppliers and vendors.
• A strong, defensible differentiator for the products or services being offered.
• A durable competitive advantage, or barrier to entry that will make it difficult for new market entrants to successfully compete.
• Strong systems, policies, and procedures.
• Stable, quality, well-trained, long-term staff with redundancy of skills and knowledge.
• Accurate and complete financial and business records that unambiguously verify financial performance of the business.  Ideally these will be prepared in accordance with G.A.A.P. and will be audited, reviewed or compiled by a CPA (with audited strongly preferred, followed by reviewed, then compiled).
• Above-average financial performance, and trends that show a history of improvements in that financial performance.
• A lack of significant legal issues, claims, or unresolved regulatory compliance issues.
• Unexploited opportunities for growth, or to improve operations.
• Quality equipment and facilities that are in good repair.

If you would like to better understand what issues may be impacting marketability and value of your business, Codiligent business brokers invites you to schedule a Marketability Assessment appointment.  This is provided as a free service to businesses that have been in operation for at least three full years and that have a minimum of $2 million in annual revenue.

You've worked hard to build a successful business and now you are selling and in discussions with a buyer.  If you are like many business owners you are proud of what you have accomplished but also recognize how much work it required to build your business.  Along the way you've learned tips and tricks that have helped you to be more efficient and effective in your key management role.  Perhaps the buyer has suggested that they would like you to consider staying on as a paid executive for the first 1-2 years after the sale has been completed.  If you're like many people in this situation, you may be tempted to convey how important you are to the operation of the business because you'd like the buyer to pay you a good salary for your ongoing transition role in the business.  Your inclination may be to say something like, "I've been the key person doing R&D and nobody else in the organization is truly ready to replace me, yet.  Because I know the ins and outs of the business if you were to replace me it would likely require 1.5-2 staff members."  You may not want to say this.

Don't get me wrong - I'm not suggesting that you lie if this is, in fact, the case.  However, if you are like many business owners you are also playing some roles in the company that could be delegated, you likely are spending some of your work week devoted to more personal projects, and there may actually be people with strong experience out there who could be hired who are more efficient and effective than you are.  The problem with selling how important you are to the operation of the business is that a business buyer may have second thoughts about whether they can successfully operate the business without you, whether they will they be able to find an eventual replacement for you, and if they will need to significantly increase the budget for replacement staff which increases their projected expenses and thus, lowers profitability and value.

Maybe exaggerating your importance helps you negotiate a higher pay rate for your 1-2 year transition, but what does this mean for the valuation of your business?  If the market rate for your position is $150,000, but a buyer believes that they will have to hire two $100,000 employees to replace you, that means they will have $50,000+ in greater expenses and lower profits.  That additional $50,000 profit if included in valuation calculations may mean a difference in value of $150,000 - $300,000 in business value.