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Through the Lens of Business Buyers
ENLIGN DEAL TEAM | 03/15/2022
When sellers prepare to put their businesses on the market, they frequently wonder what buyers are looking for in order to make their businesses as appealing as possible. When you're on the other side of the bargaining table, the answer to this question may appear mysterious. So, what are buyers typically considering when deciding whether or not to purchase a business? It should come as no surprise that a large part of this is determined by earnings and stability.
Minimize Surprises Many dealmakers beleive that "Time kills all deals". I beleive there are two reasons for this. 1, it allows deal fatigue to creep in and bad decision making to start and 2, it creates opportunity for surprises to come out. When selling your business realize that there is no "perfect" business and if there were you couldn't afford it! As such, it makes sense to discuss business challenges and failures with business buyers early in the process. Could doing so kill the deal? Yes, absolutely, but it would have killed the deal when it came out anyway. Remember a fast 'no' is better than a slow 'maybe'.
Information Reliability Buyers will want to confirm the information they receive about a business in order to avoid surprises. Anything involving past, present, or future legal issues, as well as pending customer contract renewal dates will be scrutinized. During the due diligence process, you can expect the buyer to delve deeply into the specifics of your company. You can expect him or her to do so frequently with the assistance of an attorney and an accountant. In lower middle market transactions many buyers will engage a third party accounting firm to conduct a Quality of Earnings (QoE) report. QoE projects typically cost $35,000 - $75,000. Accountants and appraisers frequently deduct one-time or non-recurring expenses. Buyers will want to look at the earnings and have proof of non-recurring expenses, such as legal fees or major building repairs. Because these expenses decreases earnings, it can be difficult for buyers to understand a business's true earning potential if not properly recast as those expenses would obviously distort the business's true earning potential in an adverse way. Employee Loyalty Wide or Deep Savvy buyers will do a deep dive on employee matters. They will want to know what is the tenure of the more senior roles? Does the org chart have appropriate depth or are there key employee issues that need to be addressed? Who owns the relationship with clients? Can the owner go on vacation for weeks or months and come back to a well oiled machine or does the entire operation fall apart?
Customer Concentration Recently I valued a business whose top 5 clients represented 76% of their annual revenue. This high percentage is referred to as "customer concentration" - meaning a few clients make up a large portion of revenue. Buyers don't like this as the loss of just one of these clients will have a dramatic impact on profits.
Vendor Issues The smart buyer wants to insure that any disruption in the supply chain will not have devastating results on the business. Are their back-up manufacturers, distributors, suppliers?
Inventory Matters Buyers want to know how much and what type of inventory is needed to operate the business. They will also want to know how much is included in the purchase price, if any is to be consigned as well as any that is unsellable, spoiled or outdated.
Revenue Stability Buyers want to see predictability in top and bottom line financial performance. Even in a cyclical business the prior years quarters should not reflect wild swings in sales or profits. Of course, no buyer wants to buy a business only to discover that its high earnings were due to a one-time contract or non-recurring macro-economic impact.
Performance During Macro-economic Downturns Most recently we endured over two years of COVID "pandemic" hype costing trillions of dollars in lost income and artificially increased prices. As of this writing we are struggling with the current administrations failed energy policies, failed healthcare policies and failed defense policies. Previously there was sub-prime, 9/11 and the dot com crash. Buyers want to know how the business performed in these adverse conditions.
In Conclusion These are just a few of the critical factors that business buyers consider when considering a potential acquisition. There are numerous other considerations that a buyer will make, and it is critical to be prepared to address any questions or concerns that a buyer may have right away, or they will quickly lose interest and move on to other potential acquisition opportunities. Consider yourself a potential buyer, and consider what kinds of assurances you would want before purchasing a business. In this regard, working with a Business Broker or M&A Advisor can be extremely beneficial. These professionals have previously worked with many buyers and can thus see things from a buyer's perspective. They will not only be able to assist you in getting ready for when buyers start looking at your business, but they will also be able to easily identify and point out areas of concern that a potential buyer may have in order to keep the transaction on track.
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