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.   

When a buyer looks at acquiring a business, they will calculate an anticipated rate of return on their investment.   When calculating their return, they will look beyond the purchase price of the business and will also take into consideration additional money they will need to invest in working capital, improvements, and capital expenditures.  If the anticipated capital expenditures are significant, it may result in a lower value and less marketable company simply because of the impact capital expenditures will have on a buyer’s return on investment.

If your business is in need of significant capital expenditures, should you go ahead and make them before selling?  There isn’t an easy answer to this question, and you should always consult your business sale advisors to discuss the specifics of your company’s situation, the type of asset(s) in question, the level of investment, whether financial performance can be maintained without the investment, and the short-term impact on cash flow.  If such decisions are made without consulting advisors, a seller may be shocked by the impact on their ability to sell.

While having aging payables may seem like somewhat of a positive as it indicates the ability to conserve cash, payables that are aged beyond 30 days can cause concern for a business buyer.  The reasons for this concern include: 

1. It may be an indication of a cash flow issue that is preventing the business from paying its bills in a timely manner;
2. Accounting and bookkeeping processes may be inefficient or loosely managed;
3. This may be a clue that there is a problem with the vendor or its quality that is causing the business to delay payment until the issues, billing disputes, claims, or warranty items are resolved;
4. The company may end up with (or may currently be getting) worse pricing from vendors because of a slow payment history;
5. The company might be at risk of a vendor only providing products or services C.O.D.; or
6. The business might be at risk of losing a supplier because of slow payment, and if so, will there viable alternate vendors with equal or better pricing, terms, and quality?

In preparing for a business sale, a buyer will perceive less risk if your company’s aging payables are the greater of 30 days or the maximum stated terms that creditors provide.  If this is problematic it may indicate that accounts receivables management needs to be improved to increase cash available for payables, a line of credit is needed or should be increased, or the company’s payables management system needs to be improved.

One of the most critical mistakes I've seen business sellers make is selecting the wrong attorney to handle their business sale transaction. Sometimes a business seller will insist on using a friend who is a business litigator or an attorney who helped them with other business or real estate issues but who has limited experience with business sale transactions.

Here are a few things to consider when selecting an attorney for a business sale transaction:

1. An attorney will usually get paid whether the deal closes or not.  Since they typically bill at an hourly rate, their financial interests are not aligned with yours.  The greater number of time-consuming issues they can bring up that need to be resolved, the more money they make.  Good attorneys who are experienced at business sale transactions realize that if enough transactions fall through, it could impact their firm’s reputation and business development activities. Nevertheless, I have been involved in transactions where attorneys create mountains out of molehills and create enough issues that the deal has almost died unnecessarily, while racking up billable hours and creating significant angst for both the buyer and the seller. When selecting an attorney you will want one who not only is experienced at representing business sellers and buyers, but also who has a strong track record of getting transactions closed.
2. The attorney’s specialty can have a dramatic impact on the outcome.  An attorney who primarily does litigation may have a strong, competitive, abrasive, win-lose orientation that is antithetical to the cooperative, pragmatic, positive, win-win approach that most successful small business transactions require. Likewise, a general business attorney who isn’t experienced at business sale transactions may not be knowledgeable about, or skilled at, dealing with even the most common issues that arise in a small business sale.
3. Some attorneys believe that they should be the primary person negotiating the major business deal terms rather than being a supporting member of the deal team. While some attorneys may be effective at leading negotiations, a skilled business broker or investment banker should usually be the one primarily negotiating the major deal terms. Your business broker or investment banker has taken the time to develop a deeper understanding of the business as well as the market and the acquirer. This knowledge will help the broker or investment banker gauge how hard to push for certain terms, at what point the buyer will likely walk, and whether if the deal falls apart there are likely going to be acceptable alternate buyers.  The role of the attorney should be as a team member - providing input, bringing up issues and risk factors to consider, negotiating the legal points of the documents (for example, representations and warranties and indemnification language) and making sure that the legal documents used in the transaction accurately reflect the business terms that have been negotiated and provide necessary protections.
4. Some attorneys do not have a strong knowledge of finance.  A lack of financial knowledge can be detrimental if the attorney is actively negotiating the deal terms. For example, I was working on the sell-side of a transaction where the buyer’s attorney was negotiating terms of a seller note. Later, as he shared with me his monthly payment and balloon payment calculations, it became apparent that the attorney didn’t have a clue about how to calculate an amortized loan with a term that was shorter than the amortization – in fact, he didn’t even know how to calculate a fully-amortized loan! Using bizarre methodology, he calculated monthly principal and interest payments that were 24% higher than they should have been, and the balloon payment he came up with was 20% less than it should have been. Without understanding the financial implications of the transaction, he was not the appropriate person to be negotiating the basic terms of the deal.  Whether you are relying on an attorney for help with negotiating the deal or not, it is good to use an attorney who has a strong understanding of business and financial issues. It may even be worth considering using an attorney who has an accounting background, an MBA, or who has owned a business.
5. An attorney's risk tolerance may be mis-matched with your level of risk tolerance. In general, attorneys will be far more risk adverse than entrepreneurs. This is good because their advice can prevent you from doing stupid or overly risky things, but sometimes it will cause an attorney to push for deal terms that are unrealistic and inconsistent with how most more-risk-tolerant business owners would proceed. For this reason it is important to make sure that you are listening to and considering your attorney’s advice, but that you are still the one making the final decision. If you perceive that an attorney will be resistive to, and fight you on, making final decisions based on your personal risk tolerance level, then you don't have the right attorney. 

Codiligent has worked with a number of excellent business sale transaction attorneys, and would be happy to make introductions.  

Codiligent is marketing a developer of a SaaS business model medical billing software used by the behavioral health industry. 

Listing Number: 1000010614
Price:     $17.3 million
EBITDA: $1,554,322 (12 months ending 8/31/15)

Link to more information: intro package for 1000010614

The following video from the Kauffman Foundation exposes some myths about entrepreneurship but they excluded one of the most significant myths: 7 out of 10 businesses fail in the first five years. This tired old misperception stems from confusion about the difference in the definitions of "non-survival" and "failure". Non-survival isn't the same as failure. Many businesses that don't survive are far from being failures. Contact Codiligent business brokers if you'd like to learn the truth about business failure rates (which are significantly lower than commonly perceived).