In my last blog post, I discussed the importance of making your company attractive to buyers because the need/desire to exit can arise quickly and without warning. In order to make your company attractive to buyers, you must first understand what buyers buy.
One of the most common errors of privately held business owners is the assumption that what makes a business profitable, also makes it saleable. It doesn’t.
A common belief of privately held business owners is that buyers will be attracted to their business because it makes money. In reality, a buyer is interested in the underlying reason why a business makes money in order to determine if the business model can be extrapolated – scaled up to make much more money.
If you want a really big payday, you have to see your business from the buyer’s point of view.
So, what do buyers buy?
Your management? No. You are no doubt a great manager. But, you will be history after the sale. Most of your team will either leave or adapt to the buyer’s style. The buyer isn’t going to pay you for something that isn’t staying. Lurking in the buyer’s mind is the fear that, without you, there is no company.
Your inventory? No. If you have inventory, what is not sold is probably not particularly saleable. Buyers will purchase it for pennies on the dollar. If you are a service provider, you have none anyways.
Your back office? Maybe, but only if your infrastructure is scalable, ie: it can be made to grow dramatically, and it is state of the art –perhaps even patented. Otherwise, the buyer will just fold yours into theirs.
Your real estate? Sometimes, but most often they will consolidate your company into their existing space, so they probably don’t even want it.
Your income stream? Yes, but only if they can double or triple it. Buyers worry that once your are gone, the income stream will vanish. Income stream and profitability will justify some price for your company, but not a high price.
Your customer list? Now we are getting close. Yes, if your customers will keep coming back once you are gone.
Your technology? Yes, but only if you have rock solid ownership which keeps competitors at bay. In other words: patents. No patents for a tech based company means you either have no R&D or you have not been careful about owning your ideas. In other words, you do not own your competitive edge. Once a few employees leave, so will your trade secrets, whether or not you have a non-disclosure agreement.
Your reputation? Yes. Yes. Yes. But only if the reputation is portable, ie: transferable. If the reputation is bound up in you, and you leave, there is no transferable value. Reputation can only be transferable if it is the reputation of the company and the company’s products or services infused into the brand and owned by trademark registrations, which need to be rock solid. Until you have converted your reputation into brands/trademarks, it is not transferable.
In my next blog post, I will give you a few examples of how reputation is converted into big money.
If you would like more information on business succession planning or would like to discuss any of these issues with Burr & Forman’s Business Planning and Succession team members, feel free to give us a call.