What Every Buyer and Seller Should Know
Two of the most critical financial transactions any business owner negotiates occur on opposite sides of the table. The day they buy their business and the day they sell it. Although the objectives are different the analytical building blocks to successfully buying or selling a business are the same.
Whether you’re buying or selling, here are some key areas to help ensure a positive outcome:
- Future Vision – Know where the company is headed. Be sure the goals and long-term plans are solid and clearly defined. Occasionally, a buyer may have new ideas about the company’s direction; however, one that is already poised for continued success is a significant selling factor. Being a seller with a clear vision can help the buyer see there is more value in the business than they may have originally considered.
- Growth Plan – Good sales performance maximizes value. A stable or increasing top line will be more encouraging to a would-be buyer than if numbers are on a downward slide. Helping the buyer draw their road map to growth will boost business value. Conversely, a buyer with a unique growth opportunity may find a great deal in a platform company that can help launch their exclusive concept. Also, understanding how the business will complement the current business or buyer’s skill set to achieve profitable growth is critical for success. Read When Searching for Merger Candidates - Substitutes and Complements Make All the Difference for some great tips on analyzing this topic for your deal.
- Earnings – Showing a cadence of earnings growth, as well as the potential for future income and ways to keep it growing, will definitely attract buyers. In fact, some will be willing to pay based on just how bright the future looks.
- Record Keeping – A company that is performing well, but doesn’t have transparent financial reports, won’t realize its full value when it is sold. Activities should be supported by impeccable financial records and reporting; tools that also make securing financing for a buyer much easier. The seller will be significantly discounted if the buyer doesn’t have faith in the seller’s records. While well-operating companies exhibit good record keeping and are premium priced, it’s risky to pursue a company with poor record keeping; a red flag the company may not be as solid as they appear on the surface.
- Steady Workforce– Low employee turnover is frequently a sign of a healthy and profitable business; while high employee turnover signals the opposite. A healthy workplace culture, with a committed team, is the best foundation on which to build success. A wise buyer will dig deep into the talents of the sellers human resources and target critical employees during the buying process.
- Transparency – Every business and industry has its issues and risks. Honesty about what those are, and a specific plan to mitigate them, communicates a position of strength for the company and assures potential buyers that hidden risks won’t jeopardize the future of the company. Alternatively, poor risk management and lack of transparency will result in buyers discounting the business value to compensate for the higher probability of negative events surfacing in the future.
- Timing – A company should be able to provide at least three years of financial statements that reflect its best performance and go to market when operations are at their peak. Both will result in a more favorable selling price.
- Market Conditions – What’s happening in a given industry can make a difference for both buyers and sellers. Getting in when trends are strong helps to make the most of an investment and positions a company to roll with changes as they arise.
- Business Valuation – There are many factors to consider when determining a company’s fair market value. Selling it short can be just as detrimental as overestimating its worth. Don’t be afraid to ask for a second assessment and compare the results to similar companies in the industry.
- Transaction Partner – Finding the right buyer or seller not only creates more value for you but can also reduce the “deal stress” created from negotiating a transaction. In a recent engagement I was involved in one of the buyers couldn’t understand why their slightly higher bid didn’t win. They didn’t realize the way they positioned themselves during the process alienated the seller. It would have taken a substantially higher bid from them to compensate the seller for the burden of negotiating with them over the other party.
Negotiating in the business world is best done after careful calculations. Gather as much information as you can and be sure to seek a trusted advisor who can help bring it all together for you. With these tips to follow and some hard work your next deal will be a success.
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