We’ve done a series of articles on general business questions that buyers will ask about the health of the business. In Part 1, we asked, among other things, Why Sell? In Part 2 we asked more granular questions, like the demographics of core customers. In Part 3 we lead with a look back, asking what the seller would do differently with the knowledge he/she has now.
In this article we will look at questions that a buyer will consider when looking at the price you are listing the business for. The answers to those questions will determine if he/she is willing to pay what you’re asking.
What rate of return do I want? Businesses, ultimately, are investments. They probably don’t feel like investments the way that a stock portfolio or a 401k can, but they are. In fact, they are often the most important investments of your life, in part because they offer a chance for outsized returns.
A Main Street business buyer doesn’t normally have hedge fund expectations. But that same buyer expects much more than one can get in traditional investments, in part because running a small business is significantly more risky than holding an index fund ETF. Some might want a rate of return as low as 10%, some might not be willing to take the plunge for less than 20%.
Action item for seller’s diligence: Can I show a consistent rate of return on my own invested capital, or can I provide an estimate based on someone meeting my selling price?
How quickly do I want to repay my acquisition costs? Buyers may have liquidated financial vehicles, borrowed from family and friends, or simply used their own savings if they don’t take out an SBA loan. The buyer will need to calculate how long it will take them to pay back that outlay in relation to your asking price.
Action item for seller’s diligence: Have standard, accelerated, and best-case scenarios for repayment of acquisition costs based on your current cash flows, less any liabilities that the incoming buyer will not have.
How steady are sales and margins? Here projections for new products and services will not be as useful as they are, at best, good estimates. A buyer is going to look at your history over years. Just as our buyers in the early teens used to look at how a business weathered 2008 and 2009, you better believe they will be paying attention to your 2020 and early 2021 numbers to see how your business weathered an unexpected global event.
Action item for seller’s diligence: Have your sales and margins charted year by year. This is also a great internal auditing tool to share with your team to see if those numbers can’t be made better.
What are the biggest risks? We’ve actually asked this question in other ways in our Questions for Buyers series, but this is more focused on financial risks. For example, a buyer might consider the risk that a key employee will leave, but that may be less of an immediate financial risk than a key vendor going out of business.
Action item for seller’s diligence: Have some of the financial risks plotted out with your estimate of the likelihood it would happen, with the necessary consequences.
Sellers can sometimes get hung up on multiples and what they think they should get for their business and when you offer action items like we have above, they might resist doing them. But what the most successful sellers know is that these are action items that not only telegraph the confidence a seller has in his/her or business, but pass that confidence on to the buyer as well. This is why my number is my number is what the answers to these questions communicate. The better your answer, the likelier a buyer will agree with your number.
Are you pondering what size business you can afford? Or how much you want to sell your business for? Our team can help you answer either of those questions. Give us a call today!