Some entrepreneurs decide to start a business with the sole purpose in mind of selling it to a business buyer. While creating a business with a built-in exit plan may seem somewhat counter-intuitive, this plan of action actually makes sense from a financial and M&A standpoint. Most likely the business owner will have the desire to sell (or pass on) their business at some point in time; for example, when they want to retire. Businesses that are structured around the intent to sell will typically do better in the buyer’s market because they are embedded with the key elements found attractive by investors. However, it is important to also have the fuel of passion for the industry in order to create a well-rounded, successful company. A company focused solely on monetary gains may have difficulty finding success.
The following steps outline elements that should be built into a business in order to display value to potential buyers.
1. Recurring Revenues
Business buyers constantly seek out companies with recurring revenues. A recurring revenue stream can be achieved by producing a product or service that consumers need to replenish frequently (such as consumables or subscription services), rather than a product that customers purchase intermittently or only one time. This type of business serves as an assurance to the buyer that the customer base will return and continually grow.
2. Proprietary Products
Another business type that is attractive to buyers is the kind that vends proprietary products. Proprietary products include those with merchandise or patents that are not easily duplicated. Having a corner on the market will add great value to a company. Many successful businesses choose to focus on selling one proprietary commodity rather than attempting to be diverse with their offerings.
Manufacturing companies appeal to strategic buyers because successful wholesalers tend to seek out vertical integration, or the act of extending control to include all aspects of the supply chain. Therefore, manufacturers are frequently bought out by their distributors.
4. Barriers to Entry
Barriers to entry allow a business to corner the market and prevent competitors from acquiring all of the clients. Patents are an excellent example of barriers to entry because other businesses cannot legally infringe on your product. Other common methods of creating barriers to entry can include achieving a strong brand and customer loyalty.
5. Physical Assets
Rather than renting machinery and parts, the ownership of physical assets can assist in the sale of your business. Not only can physical assets be used as collateral for financing, but if the business fails, the physical assets may be sold.
6. Keep All Documentation in Order
Buyers that are not sentenced to muddle through mile-high piles of paperwork will sometimes offer a higher payout price as a return for a well-organized documentation system. As exhausting as due diligence can be, providing accurate bookkeeping from the beginning will prove to be an advantage to any prospective buyer.
7. Be Disposable
For those starting a business from the ground up, it may seem impossible to detach the business owner from the business. It is true that the business owner will most likely hold all of the intangible assets, but this method of business management is a turn-off for buyers. When a business buyer seeks out an acquisition opportunity, the deal will not typically include employing the business owner. Purchasing a business that cannot run without its owner is a worthless endeavor for buyers. This is why it is important for entrepreneurs looking to sell their business to make themselves a disposable aspect of the company. This can be achieved by developing a strong management team and passing along knowledge to employees. Be sure that the responsibility of the workings of the business’s products or services can easily be transferred onto others. The sales department should not consist solely of the business owner for this same reason.
8. Give Managers a Reason to Stay
If a business owner becomes irrelevant to their company, then there must also be incentive for the managers that he or she has trained to remain employed with the company after the sale. This can be achieved by creating long-term contracts or frequent bonuses and pay raises.
Would you like to learn more about how to tailor your specific business to be more attractive to potential buyers? George & Company is one of the top mergers and acquisitions firm in New England and we would be more than happy to assist you in preparing for a sale. Contact us today.