A lot of people start their business with dreams of one day potentially selling it or having it acquired. If you are just starting out as an entrepreneur or you have a business idea you want to pursue, you may be wondering why you even need to think about selling your business at this stage.
Even if you aren’t planning to sell, building your business thoughtfully and with an eye toward making it highly acquirable is an effective way to build a healthy business. Plus, you’ll always be prepared in case an opportunity or desire to sell arises in the future—it’s a smart idea to have an exit strategy.
The sad reality is that many business acquisitions do not work out as hoped. Either the person selling their business gets significantly less than they planned, or they are not able to find a buyer at all. An ROCG study of 502 business owners with revenues between $1 million and $100 million found that only 40 percent successfully transitioned their business and only 9 percent had a formal, written succession plan. The primary reason given was that they had planned poorly or not at all.
Selling a business starts on day one. The decisions you make as you launch your business will impact your decision to sell in three, four, and even five or more years from now. To sell your business successfully and make it acquirable, start preparing and planning right now. While you’re at it, check out Bplans business startup checklist download for a complete list of steps to keep in mind while you start your business.
How do you make your business acquirable?
To make your business ripe for acquisition, make your business appealing to potential buyers. In sales, it is a common practice to take the needs, wants, and desires of your potential customer and to present your product or service as a solution.
The same approach holds true if you want to make your business more desirable for sale. Once you know the needs, wants, and desires of a potential buyer (whether that is a giant corporation or someone who wants to run a business like yours), you can position your business in a way that appeals to a potential buyer’s motivations. Think of your business as your product, and your customers as the ones who will be buying it and give them exactly what they want.
What do business buyers really want?
Business buyers focus primarily on ROI, or return on investment. To break this down, think about every acquisition or purchase you make in daily life. Maybe you eat healthy food and you pay a premium for it, but you expect a return on your investment, which is good health. When you pay to eat out at a restaurant, you expect a good dinner and experience, or a positive return on your investment.
In simple terms, your business buyers will expect a return on their investment, so it’s your job to position your business in a way that gives buyers a real opportunity to earn a strong return on their investment. With business acquisitions, the primary focus of the ROI is money. Buyers want some assurance that your business will be profitable in the future.
Most business acquisitions focus on money. Even though a lot of technology-focused startups develop their businesses with the hope that they will appeal to a strategic buyer, one who might focus the purchase on emerging technology or a great idea, this is not realistic. Even with technology acquisitions or unique purchases where tech is the main asset driving the acquisition, the company’s ultimate goal is to leverage that technology to drive ROI. There are no buyers who acquire businesses with the goal of losing money.
Though ROI is the most important factor in business acquisitions, it isn’t the only one. I’ve worked with dozens of businesses that had healthy earnings, yet they did not sell because they did not have other factors in place.
Let’s take a look at four other factors most business buyers consider before they pull the trigger. Remember, these need to be at the forefront of your mind from day one to effectively position your business for sale down the road. Thinking about them early increases the likelihood that your startup will be profitable either way.
Recent history and trends
Savvy buyers will definitely ask: What has your business done in the months preceding the acquisition? Are your profits trending upward or downward? A business that is growing in revenue and earnings and trending upward will be more desirable to a potential buyer than a business that is declining.
What’s your biggest business challenge right now?
I spoke to a business owner recently who was bringing in $1.7 million in sales revenue. The problem was that in the prior year, his business lost money and fell to $350,000 in revenue. When he came to me, he was hoping to value the business at that $1.7 million mark, even though his profits had taken a recent nosedive. He believed he could get the revenue back up to its former glory, but a situation like this will spur buyer skepticism.
Serious buyers will want to see business stability and growth, and their best indicator will be its recent history. Buyers don’t care as much about potential or opportunity for revenue. They want the real numbers, and if they don’t look good in the present, the acquisition may not be successful.
If you’re unsure of where your business stands (both in terms of your own skill set and external factors), consider doing a SWOT analysis on your business.
Areas of risk or dependencies
If you ever watch “Shark Tank” on TV, you will notice that the business owners looking for investments often value their businesses far above what they are currently worth! Though sometimes these business owners wildly inflate their value, this practice is not uncommon in business acquisitions.
When a buyer acquires an online business, they often think of the value of your business in terms of a “multiple.” The multiple represents the number of years it will take them to earn back their original investment to acquire your business.
For example, let’s say your business is earning $200,000 in revenue and you sell it for three times that, or $600,000. The buyer will need to wait three more years just to break even on the investment if there is no growth.
Because a buyer is paying a multiple on the current annual earnings, they will want to ensure the business will be profitable years after the acquisition so they can make back their initial investment.
Because of this, buyers look at a type of risk called “dependencies” and determine if the threat of dependencies becomes more of a threat than they want to take. Be proactive. Watch for these dependencies right now as you are building your business.
Here are some common examples of dependencies that buyers would consider threats to your business:
- Your success relies on the success of another company. For example, you build a business on helping business owners market their businesses of Facebook or Twitter. This business model relies on the success of Facebook and Twitter. Diversify your marketing options for your clients and develop marketing programs that are not dependent on another company’s success.
- You work with only one vendor and you have no backups. Diversify and find replacement vendors. You do not necessarily need to use multiple vendors, but have backup vendors ready should a need arise.
- You run a services business and a small percentage of your clients make up the largest percentage of your revenue. While you will want to keep your star clients, make sure you dedicated a sufficient number of resources to nurture smaller clients and to onboard new clients.
- Your revenue is reliant on your Google traffic and rankings or a factor not directly controlled by you, the business owner. Build an email list and social media traffic. Start a pay-per-click campaign that is profitable. These do not need to become your main source of traffic; they just need to be sufficient enough to support the business should you lose your rankings.
- The business can’t run without you. Are you crucial to the operation of your business? Is another important role filled by someone irreplaceable? If so, when you sell it, this would denote a key person risk for the buyer. To avoid this, develop standard operating procedures to make every role and every job replaceable.
- You run a seasonal company. Are the sales dependent on a specific time and not recurring steadily? You can either develop products or services that appeal to customers during the offseason, or you can develop a business cycle that allows for proper planning and preparation for the busy season.
- There are legal issues hanging around your industry. When the e-cigarette industry was new and up-and-coming, a lot of people contacted my firm for valuations. Back then, however, there was a possibility that the FDA would regulate the industry which brought about a concern that it would collapse. This did not happen, but this is an example of a legal concern that could affect the sale of your company.
Take these points into consideration now during the beginning stages of your business growth. This way, when it comes time to sell, you will keep your risks and dependencies low.
Is your business easily transferrable? If you take yourself or another key person out of the equation, can it run easily without any difficulty? Is it dependent on one key person who possesses all of the knowledge and skills to run the business?
I touched on this above when discussing risks, but this point is important enough to stand on its own, and it is something you can guard against as you grow your business. Avoid a situation where you will place key people in positions who become too difficult to replace.
Examples of this would be a mortgage brokerage firm where the key person in this business requires a license, or a website that has grown due to a personal brand or personality. This key person will be hard to replace since the company’s success is dependent on the person’s unique brand characteristics.
One of the ways you can make your business easily transferrable is to create documentation and standard operating procedures (SOPs) that outline all of your business processes. Business growth can be hectic at times, and many business owners forgo creating SOPs as a result. But, the longer you wait, the harder it becomes to create proper documentation when it comes time to sell. Start now and systematize as much of your business as you can while you grow.
Ensure your books and financial records are clean. I know this can be a source of stress, but I promise it will be well worth it. A prospective buyer will want to review all of your business records and documents, and if you do not have them organized or you don’t have enough to offer, you will not be able to sell or your profit will be much lower.
The good news is that you don’t have to do the books yourself. Hire a bookkeeper early to help stay on top of your books from day one.
You should also document and diagram your business. Take an afternoon to map out the different aspects: your marketing efforts, how you work with customers, what you need to provide service to your customers, and so on.
For example, at Quiet Light Brokerage, I would have sections for marketing (which would include SEO, pay-per-click, content, and conferences), our core service (which would consist of our brokers), our accounting department, and so on. Many business owners think they know what their business looks like, but once they sit down to actually focus on it, they uncover missing pieces.
The best way to start your analysis is to create a thorough business plan. Even if you have already started your business, a business plan will help keep you organized and aware of all the working parts. Need help? Bplans has 550 sample business plans you can review to get you started.
Whether you have dreams of selling your business in the future or not, start your entrepreneurial journey by analyzing your risk the way an outside buyer would, and creating a strategic plan from day one. It can only make your business stronger. A successful acquisition begins the very first day you start your business.