When you think about your business, how would you describe it? Your job? Your passion? Your life’s calling?
There is no wrong answer here. But one word that often escapes entrepreneurs when describing their company is “investment”. This is crucial, because those that are able to make this association often find themselves in a much stronger position to maximize the potential of their exit plans.
Why is this?
Because those who see their business as an investment are seeing it from the same perspective as a potential buyer. They are looking at its capacity for future growth. To increase revenue. To secure greater market share.
Seeing your business through the eyes of a buyer puts you in a strong position to understand and correct any concerns that they might have about the prospects of your company, and to pinpoint the key intangible assets that would capture their imagination and encourage them to pay a premium for your company.
But what if you don’t have this perspective?
Then, at least in my experience, you will be in a similar boat as many other entrepreneurs; business owners that are often too preoccupied with the daily operations of their company to take that step back and look at their company from a buyer’s perspective.
Furthermore, I have found that most business owners tend to err in one of two directions when they attempt to look at their company objectively:
- They are overly critical of their company’s shortcomings to the point that they obscure the positives.
- They are overly optimistic about their business’s prospects and processes to notice any areas needing improvement.
Both of these can be problematic for attempts to maximize the value of your exit strategy, but it is the latter of the two that is more common among entrepreneurs. This perspective not only clouds their minds from making changes that could improve their worth to buyers, but it may also mean they mistake potential red flags as major selling points.
For example, let’s say that your company has four customers that account for 50% of your overall revenue. To a business owner, this might be viewed as a positive for several reasons:
- It shows your company has built strong, lasting relationships, a sure sign of its good reputation
- It shows your company treats its customers well so they will continue to use your products and services
- It shows that your products and services are of great quality
However, a professional buyer will not necessarily look at these the same way. Instead, when they see that 50% of your revenue is tied to four customers, their big questions will probably be:
“What will happen if those four customers disappear when the business enters new ownership? What if the relationships with these key clients are completely tied to the current owner?”
Where an owner sees benefits, a buyer might see risk. Similarly, you might see it as a big bonus that your experience and industry knowledge has guided your company to new heights, and has helped establish you as a leader in your field.
But, unless you are planning to stay with the company post-acquisition in some form of earnout agreement or similar deal, the buyers won’t be acquiring you when they purchase your business. So instead of being impressed by your expertise and how dependent your company is on that to thrive, they will ask questions like:
- Do you have a middle management team?
- Who is in a position to take over from you upon your departure?
- Do key clients/customers know anyone outside of the owner?
- Who is more important to the brand – the owner or the business itself?
Owner dependence and customer concentration are two of the biggest red flags for prospective buyers because, fundamentally, their objective is to acquire targets that present the biggest opportunities with the lowest degree of risk.
Giving buyers what they want
So, how can you gain this insight into what professional buyers are seeking in companies like yours? As most entrepreneurs will only exit one business across their lifetime, this is not something you can afford to pick up on the fly…
The best approach is reaching out to an experienced M&A advisory firm like Generational Group. Because of their extensive knowledge of the factors that influence both buyers and sellers over the course of a transaction, their expertise will be incredibly helpful in gaining an insight into the intangible assets of your company, and the areas that buyers may be concerned about.
Plus, firms like Generational provide a truly objective perspective. Now as one of our former clients, Warren Peck of Phoenix Rising Aviation, once rightly claimed:
“No one likes to be told that their baby is ugly.”
The same can be said of most business owners towards their company. But, as I highlighted earlier, this attitude can cause you to miss vital areas of improvement which, if not addressed, can limit any potential offer from a professional buyer.
That is why the independent, honest perspective of a reliable M&A advisor is like a spoonful of medicine – it might not feel great to swallow, but once you do, you’d be surprised at how quickly things start to improve!
As a general rule to get you started, addressing the following key risk areas will help you make great strides in bridging the valuation gap between your expectations and the buyer reality:
- Reducing owner dependence
- Improving customer diversity
- Enhancing profitability
- Augmenting sales and marketing teams and processes
- Restricting customer and supplier churn
- Documenting key internal procedures and policies
- Making sure your financials are accurate and in order
The good news is that most of these can be addressed starting today, and by doing so, can make a substantial difference to your exit prospects.
But, an M&A advisor’s job is not only guiding you in areas needing improvement – it’s also to highlight aspects of your business that will help you stand out from the crowd of acquisition targets and capture the imagination of particular buyers.
I’m again referring to your company’s intangible assets. These are components that you might currently take for granted as part of your daily operations. But, to the right buyer, these can be the difference between an exit where money is left on the table, and an optimal exit that fulfills your ambitions for life after your company.
Providing a complete list of intangible assets would require a completely separate article to be written, but they can include:
- Recurring revenue streams from multiple customers
- Experienced employee base with low turnover
- Solid and documented systems and procedures
- Stable and large vendor base
- Significant market size and growth potential
- Dedicated and skilled sales/marketing team
- Well-trained and mentored middle management
- Regularly updated business plans
- Proprietary software developed in-house
- Defensible market share
- Business location(s)
By working closely with a professional M&A advisory firm, you can build a stronger understanding of these intangible assets and what they could be worth to the right buyer. While the majority of these won’t mean a lot to all buyers, one or two could really grab the attention of one or two buyers and send the value of your business in their eyes skyrocketing.
Once an advisor has identified these unique traits, they can then actively source buyers from their network who they believe will be interested in these, which in turn could significantly enhance your company’s valuation to them. It will also shape what to include in your Offering Memorandum and similar documentation designed to capture the imagination of prospective buyers.
Demonstrating “intentional growth”
Something else that professional buyers will seek from a potential target is a clear strategy for “intentional growth”. Some companies achieve consistent levels of growth without having documented strategies in place, be it due to the quality and popularity of their products/services or enjoying a boom period for their industry.
However, a plan for intentional growth is substantially more appealing to buyers as it demonstrates to them that there is a method behind your development – one that they can then maintain and build upon once they acquire the company to ensure that this growth continues.
Again, questions that savvy business buyers will ask about your prospects for growth will include:
- What plans do you have to grow your company in the coming months/years?
- How are you implementing these plans?
- Do you have both tactical (short-term plans) and strategic (long-term plans)?
If you believe this is something you’re lacking within your own company, the assistance of a team like Generational Consulting Group can make a massive difference. Not only will this help to accelerate the growth of your company, improving its performance both short term and long term, but it will demonstrate to buyers that you have a roadmap for consistent growth.
This will encourage them about your company’s future which, as I established earlier, is what a buyer is purchasing from you.
The value of seeing a buyer’s perspective
In order to achieve your aims of one day exiting your company for maximum value, being able to objectively analyze your business from the perspective of a buyer is a crucial skill to master.
Hopefully this article provides you with an introduction into developing this mindset. But, I cannot stress enough the value of hiring an independent M&A advisory firm to guide you as you grow your business and enhance its buyer readiness.
This impartial analysis of your business will give you a clear indication of the positive and negative factors influencing the attractiveness of your business in the eyes of buyers, and set you on the path to correcting the issues and emphasizing its intangible assets on your journey to exit.
If you would like to learn more, I would encourage you to consider attending a Generational Growth and Exit Planning Conference. Here you will learn game-changing information to support the continued growth of your company, and how to build a truly “buyer-ready” business that maximizes the value of your exit strategy.
You can also discover more valuable advice and guidance on all things M&A and exit planning from Generational’s regularly-updated insights.