We speak and meet with small business owners on a regular basis. Being privy to their successes, their failures and their fears is something that I truly treasure. As a trusted business advisor, a large part of our responsibility is sharing the years of knowledge and experience that we have garnered from both buyers and sellers of small businesses to better assist our clients, colleagues and prospects on the various challenges to expect when selling a business. In a nutshell, while there are many fears a buyer will have when purchasing or investing in your business, our experience has been that the main 3 issues will likely be:
- The owner/seller IS the business – In other words, the company lacks a management team and structure to “steer the ship” if something were to happen to the owner/seller. It is ironic that the very traits that powered an entrepreneur to success (ambition, drive, perfection, control, work ethic and more) are the very same factors that often hold an owner back from “letting go” just a little bit on his/her control of all aspects of the company for the betterment of long-term company success. Whether a buyer is strategic or financial, the less reliant an acquisition is on any one individual, the greater the price will be they are willing to pay for it.
- Revenue concentration – Often times, an owner will proudly tell us how revenues have doubled or tripled over the last 5 years. While that sounds terrific on the surface, upon further discussion, we uncover that over 50% of the revenue is derived from 1 or 2 customers. This implies enormous risk for a buyer of the company. If something happened that caused those 1 or 2 customers to no longer purchase the goods or services of the company, the business would take a severe blow. As a general rule, broad revenue diversification lowers risk for a buyer and typically results in a higher price paid for the business. Usually, the danger level is if any one customer comprises around 15% or more of total revenue or if the top 3 customers represent 25% of revenues or more. This varies by industry and is by no means a “hard rule”, but it is a good barometer.
- Valuation – Most business owners believe their company is worth significantly more than a buyer would most likely be willing to pay. This is typically due to the “emotional element”. You have likely poured your heart and soul into making the business what it is today. The harsh reality is that will not increase the value that the market will likely pay to acquire it. Simply stated, valuation is a combination of where the business is right now, it’s trend over the past 3 years and where it could go in the near future.
There are many other factors involved but these 3 points are paramount for all business owners. If these issues or others are of concern to you or your clients, we are a resource for you and feel free to contact us.