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In the Business World ...

What Buyers Look For

By Bryce DeGroot, Guest Writer

Editor’s Note: The following is Part Two of a guest article on the exit path for transitioning out of your business. Part One “Crucial Considerations in Selling Your Business” appears in the Winter 2014 edition of the MMEC Forward Focus newsletter.

Recently, Jim, a long-time business owner, asked me what buyers are looking for in today’s market. Of course, this is the ideal question. To be successful at selling anything, we should think like the buyer and sell what the buyers want to buy. An entrepreneur or investor who can write a large check to purchase a business will be savvy. A business must be well positioned in order to attract the best buyers and achieve a maximum price.

Businesses often have two divergent ‘values’.  The first value is in the mind of the owner, who has expended blood, sweat and tears in building the business over many years.  The second value is what the market will pay for the business.  We often see a gap between the two values, which can prevent a business owner from realizing their goals.

Jim asked what he should consider to help close the value gap. He is thinking in the right direction, because business owners can often close the value gap by working on the company. Value drivers are the business attributes that give a business real and perceived value. Value drivers are the business areas that a buyer will ask about.

A buyer will ask questions like the following. What is the proven cash flow of the business? How likely is that cash flow to continue under new ownership? What impact would result from the business losing a customer, key employee, supplier, etc? Does the business hold intrinsic value or is it highly dependent on the owner?  How are the products positioned in the market? Is there proprietary product, or can a competitor easily replicate it?  What is the real growth opportunity? Is the workforce stable, high performing and satisfied in their jobs?

Each question is simply seeking to understand the relationship between the expected cash flow and risk of the business. The value formula can be written as Value = Cash Flow/Risk. Expected cash flow adjusted for risk determines the value and salability of a business. Though the value formula may seem theoretical, it describes decisive value drivers that real buyers look for in the real world.

Jim is like a lot of business owners. He has worked hard and built a profitable business that benefits its employees and customers. I am confident that Jim will continue to think about the value drivers in his business and form a plan to capture the value he has worked so hard to build.

Editors Note:  Bryce DeGroot is the president of Compass Advisors, a merger and acquisition firm based in Bozeman. He can be reached at 406-282-6000 ext. 801.