All small businesses are going to go through transition.
The baby boomers are experiencing this now. There will be three options from which the owner might choose.
1. Transfer ownership to the family,
2. Close the door, sell the assets, pay off the debts, or,
3. Sell the business to employees or outside buyers.
I have seen estimates that the third option will be the choice of more than 60% of the owners leaving the business. After all the hard work and commitment you have made, you deserve a maximum return. I would like to share some thoughts on what potential buyers will think most important.
The Income Statement and Balance Sheet
Potential buyers will want to see at least the last three years of your financial statements. They should be prepared by an outside CPA firm. This will give credibility to the numbers.
Has there been a pattern of consistent growth in both revenue and net income? Annual growth of 15% in both Revenue and Operating Profit makes a company very attractive to investors. I have worked for a company that hit those targets and the owners became very wealthy. It can be done.
Has your company had income gains from economies of scale? What has been the trend of the Gross Margin and Operating Income over the past three years.
Looking at the Balance Sheet, how professionally managed and current are the assets, both current and fixed assets. Will the buyer have to invest in new equipment to stay viable in the marketplace or write off inventory or accounts receivable.
Are your projections for the next three to five years believable compared to the past three years?
Your success in gaining and keeping customers is the Value Driver of the business that will get special attention. Here are some of the questions the potential buyers will want to check.
What is your history of gaining and holding your customers? Is your product(s) a commodity that is price sensitive and easily supplied by competitors. Is there intellect product protection and/or a tight control to keep your special confidential.
How diverse is your customer base? Having one or two major customers is risky
Are you dominant in your served market? Quoting the IPO group, being number one leads to premium pricing, lower sales cost and a longer product life cycle. What percentage of the market do you serve?
How good is your SWOT analysis? SWOT stands for Strengths, Weaknesses, Opportunities, and Threats.What makes your company a vendor of choice and can you hold and grow those strengths?
What major technology changes are taking place in your market and are you taking a lead role?
The management team
One question every business owner should ask is “If I go away for a month or two, what will the company look like when I get back? The value of a small business increases when the management runs the company using the owner’s capital. The owner is the leader and is over the operations, not in them.
Are there any individuals in a company, such as a key salesperson, that if they left there would be a significant impact on the company's performance?
Has a strategic plan been developed and identified the 5 to 10 key result areas that will keep the company growing and strong? Have these key results areas been assigned to members of the management team and are they performing?
Are there safeguards such as non-compete/non-disclosure form signed by employees.
Is there a lender that will finance the sale?
What I have listed above is a high-level overview and major areas covered in a due diligence review by a potential buyer. It is basically a risk analysis by the buyer and the higher the perceived risk, the lower the price offered. One way the professionals set the offering price is to take the Earnings before Interest, Taxes Depreciation and Amortization of Intangible Assets (EBITDA) and use a multiplier of 0-5. Why not put yourself in the position of the buyer and set the price you would offer for your company. Then set a plan in effect to achieve a multiplier of five or more in 3-5 years. You deserve to get the most from your efforts. SCORE is here to help.
Dick Jordan may be reached at 218-251-4413 or firstname.lastname@example.org