I believe Stephen Covey, author of “The 7 Habits of Highly Effective People,” coined the phrase, “Begin with the End in Mind.” You could say goals are a form of this. Most small businesses do not sell. Why might we ask? Simple no one sees value in them. They are either too dependent on the owner, do not have systems, are too focused on income taxes, etc. Since businesses usually will sell for a multiple of EBITDA it makes sense for any business owner to structure the business for eventual sale.
How Do You Do This?
Simply create something someone else wants that can run independent of yourself.
Systems– Prospective buyers want an owner’s manual or a structure to allow the lowest level possible to operate the business.
Profitability – Prospective buyers want to see a track record showing the company knows how to make a profit. Tax returns and financials are usually what proves this. If prepared internally they could have less credibility.
Management or Key Person – This may vary, but many prospective buyers want a strong management team in place providing continuity to the new ownership. Sometimes lack of familiarity can damage profitability
Consistency – I would much rather see earnings consistent over a span of years versus large spikes in net income. This shows stability. This also shows this is the norm versus the exception. Anyone can get lucky once, but it takes skill to consistently make a profit.
Familiarity – I do think it make sense to know who your potential acquirers may be. Do research, make yourself known to them. Many times customers may buy a supplier for this strategic reason. Customers will accept change but also not too much or they will look for other options.
We recently had this happen to a customer. They targeted a former employer as a potential buyer. When the time came the due diligence occurred but the deal did not close. Next they turned to a large customer, and bingo the deal recently closed.
What attributes did they have?
All the things I just spoke of, including consistent earnings over a long time period. In spite of uneven sales they always made money every year. They had key personnel in sales and operations who the new buyer valued. They were familiar with our client since they were already a customer. They prepared quarterly financial statements for many years which provided verification of income. Additionally the financials were prepared by a third party which provides less room for error or exaggeration. They had two accountants over the life of the company, approximately 25 years. If one had not died, maybe it would have remained one. This shows a great deal of consistency. If the company changes accountants ten times over 20 years might someone ask, “Why?”
All these factors made the company an attractive acquisition target. From an accountants perspective it is satisfying to see this effort culminate in a sale.
Having a persona and a platform of integrity do not hurt either. Would you want to buy something for a large sum of money from someone you did not trust or have confidence in? Likely not. They did it the old fashioned way. They started it, no shortcuts or skipping steps. The owners were and are active in the business while they no longer own it.
In closing, this is not to say every business must have all the formative attributes to sell. I would say though the more you have the better. I have seen several clients businesses sell during my tenure and most seem to have these common themes.