Value Drivers in Business Sales
Most business sell in industry ranges based on a multiple of EBIT (earnings before interest and taxes) | EBITDA (earnings before interest, taxes, depreciation, & amortization) | SDE (sellers discretionary earnings), so why do some businesses sell for a premium? What value drivers are business buyers looking at besides pure profits?
That’s right, it’s not just the profit margins that draw in potential buyers. Business buyers are looking for more than just profits, or your company’s products and services that when they think about what business to purchase. They want something else, something that can’t be calculated in numbers or on spreadsheets. Businesses need to understand these “value drivers” if they want a premium on the sale of their business. For any specific business and for any one buyer prospect, these “value drivers” will be unique. Generally, they can be grouped under one of the following general categories.
What Business Buyers Want in a Business
If you were to take two like business, same industry, same products, and services with comparable profits a buyer will pay more for the one that is perceived to be more attractive. All buyers are looking for value, but are generally more attracted to business in a great location, with operating systems in place and a proven track record of stability.
If you are looking to sell your business for a premium, its important to examine the following value drivers in your business.
- Strong Market Position
- The Right Location
- Working Operating Systems / Process
- Proven Stability
- Interesting business, or unique perspective on the industry
- Clean Financials | Good Records / Books
- Reasonable Sales / Transitions Terms
Every potential business buyer is unique and will weigh each value driver differently. Let’s take a deeper look at these potential value drivers for your business.
A Strong Market Position;
A strong market position can be anything form repeat clients to long term contracts to cornering a niche within your market or industry. If you are working in a services based industry like HVAC, Electrical or Plumbing, the companies within these industries that go for a premium have a diverse clientele. Their business has a healthy mix of both commercial and residential customers. Whereas a business in this industry that is heavily tied to new construction, will go for less as it is tied to a industry that is known to have big swings and thus will directly impact your operations. The same goes for business where one large client makes up 60%-70% of their profits, this is less desirable than a business that is diversified and with a protected income.
The location of your business is important to some buyers, even if it doesn’t affect them personally. You wouldn’t want a manufacturing facility right in the heart of a major downtown metropolitan area. The taxes would be astronomical, you wouldn’t want to worry about paying for parking for 200 employees, and so on. There is a reason that most major manufacturing facilities are “out in the middle of nowhere.”
The same thing goes for choosing the right retail location. If you have a business that relies heavily on walk-in foot traffic, you want to be in a great location with a lot of foot traffic, not around the corner where no one can see you. In short, not having your business in a desirable location for a business like yours, could cost you in the final sales price.
Working Systems & Processes
Businesses buyer want companies who invest in new technologies and processes so they can stay competitive long-term.
A company that has invested in systems, especially information systems, has more operational excellence than its counterparts. This includes increased efficiency and productivity. It also leads to better business practices as well as better management behaviors. Buyers are aware of the survival capability of any business by getting to know if they are keen on improving their working systems.
Long Term Relationships
Business buyers are looking for companies that build relationships over time. This is especially important when it comes to small businesses or local businesses.
Buyers want business that adopt a service-over-sales approach. This guarantees them that clients will stick around after the new ownership is in place. As such, the new owner can continue to foster a long-term relationship with the customers by investing in efforts that create a seamless experience.
Here are the specific traits buyers will look for within regard to long term relationships
- Open as well as effective communication
- Respect between the parties involved
- Fairness in the deals the parties involve themselves in.
- Directness geared towards honesty coupled with transparency
As a business owner that is considering selling, get back to the foundations in order to build a solid relationship with your customers that will last beyond your tenure. This way, you will ensure that your customers remain loyal to the business.
Attractive or Interesting Work:
Sometimes companies can be so focused on what they do that they forget to communicate it in an interesting and attractive way. It doesn’t matter how well you’ve marketed or communicated your product/service if the quality of work isn’t up to par.
Some buyers will not care about price as much as someone else, choosing based on other factors such as value drivers. Sometimes suppliers think their profit margins are low but neglect certain costs which affect them more than others (e.g., maybe they overlook the cost of capital equipment).
Long Term Growth
Buyers want a business that invests in new technologies and processes so they can stay competitive long-term. If your business invests money into making room for growth, it also increases its attractiveness because it signals that the business is looking to expand or improve. Buyers are aware that businesses that have grown over time have become anchors in their industries. Not only so, but they also have better products with greater value than startups. Furthermore, established brands care about being in business and being relevant in the community.
Indicators that a business is concerned about its Long-Term Growth
- Having a strong vision and mission clearly stipulated
- Increased investment in smart technologies that allow growth.
- Attention on the people surrounding the business, from the workers to the buyers.
- Clean Financials (Good Books & Records)
Reasonable Sales / Transition Terms
Are you willing to offer reasonable sales terms and suitable transition time to the new potential owner? This will also very widely based on industry and the individual needs of the buyer. As long as you are open and willing to negotiate and help the buyer, this should lead to a successful transaction.
Business buyers will absolutely be spreadsheet driven and make offers based on some multiple of EBIT, EBITDA, or SDE. But addressing all of the extenuating value drivers outlined above are going to determine the difference in a 3X multiple or a 5x multiple.
We also believe the way you present these value drivers to a potential buyer can have an impact on the cashflow multiple that you will be offered, that is why we pride ourselves on setting the standard for professional marketing documents to advertise business for sale. With professional copywriting, skillful analysis and cutting-edge graphic design.