Sell your Business E-Book Extract Part 5 – Buyers

Posted on Aug 4, 2015

The primary reason someone buys a business is to get a return on the investment. Each potential acquisition will be judged on what level of future profits the buyer believes the business can generate, the level of risk attached to reaching these targets and by the attractiveness of the industry in which the business operates.

 Why Buyers Buy

The primary reason someone buys a business is to get a return on the investment.  Each potential acquisition will be judged on what level of future profits the buyer believes the business can generate, the level of risk attached to reaching these targets and by the attractiveness of the industry in which the business operates.

The first thing a potential buyer will look for is a sound financial history. Ideally the business will have recorded a steady increase in profit for the last two to three years, with a similar increase in sales over the same period.  If the profits and sales figures are inconsistent or showing a downward trend, it may be better for the entrepreneur to delay putting the business on the market until the financial results improve.

It is more difficult to sell a relatively new operation, because of the lack of historical data.  If this is the case it may be advisable to delay selling until the business has a proven track record.

However, some investors will still be open to a business that is relatively young but has overcome the challenges facing a start-up.  These include an established customer base, sound internal systems, market awareness and credibility, an operational framework and cash flow.  Another reason people will buy an immature business is financiers are more likely to lend to an existing business with even a short track record.

Potential buyers are reassured if they see the business has been systemised to such an extent that the absence of the previous owner will have almost no effect on its operations. A good starting point is for a business owner to look what he or she does for the business and identify other staff members who have the potential to take over specific responsibilities.

Industry trends also influence buying decisions.  At any given time certain industries or business trends will be in favour.  For example, business that manufacture and sell ecologically friendly businesses would have struggled a decade ago but in today’s environment there is a great deal of marketing mileage to be made from an ecologically responsible product or service.

 

Negating Risk Factors

Buyers assess any business through the filter of risk.  If the business is well organised and driven by strong systems that make employees accountable, it becomes less risky for a new owner.

One of the first questions a buyer will ask is why the vendor is selling, and a vendor needs to be able to provide a genuine and consistent answer. There are many legitimate reasons for exiting a business.  These include wanting to sell to someone with more resources who can take the business to the next level, selling to someone who is younger and more energetic, or lifestyle reasons such as spending more time with the family or dealing with health issues.

Buyers minimise their risk by carrying out a thorough due diligence investigation and sellers maximise their position by being prepared for the scrutiny that prospective purchasers will put the business under.

One of the biggest issues for buyers is how reliant the business is on the current owner.  Research shows this is a legitimate concern, with 40 per cent of business owners claiming the business totally depends on them and a further 44 per cent saying it does to a major extent.  However, 71 per cent believe another person could readily take over the business if necessary.

If it appears that the goodwill of the business rests largely with one individual, the risk attached to buying the business increases markedly.  An exit strategy needs to include a plan to separate the business owner from the day- to-day operation of the business.

There are three types of investors:

 

Owner/Operators

Often these are micro businesses, bought by an individual looking for a self-employment opportunity.  Owner/operators may be individuals who have recently retired or been made redundant or people who are looking for change in professions.

Sometimes this group of buyers choose an industry that is an extension of a hobby, so, for example, someone who is a keen fisherman might decide to buy a fishing shop.  In these cases, there is a degree of passion attached to the decision making process, which can work in the seller’s favour when negotiating.

If a purchaser intends to make a living from running the business, its ability to generate cash flow will be a key consideration. A

owner/operator will also focus on how long it will take to earn back the investment.

An owner/operator business usually has a well-defined life cycle and most buyers will want to purchase a business in the later half of its life cycle, when there is still an opportunity to add value but the customer base is solid.

Owner/operators can also be people coming to this country under a business migration program.

 

Financial Investors

There are two groups of institutional investors:

  • Angel Investors are cashed up individuals who typically invest in 1-5 business that  need capital to grow. An Angel Investor is looking for a return on investment and an exit strategy.
  • Venture Capitalists, who normally make larger investments than Angel Investors and are also less flexible than Angel Investors. Venture Capitalists look for higher returns commensurate with high-risk investments. The due diligence required before a Venture Capitalist buys a business can be onerous.

Strategic Investors

Strategic investors will often pay more for a business than financial investors and therefore an exit strategy must identify other businesses that have a strategic fit with the business for sale and research where the best opportunities lie.  Usually strategic investors will be found within the industry a business operates in, so people thinking of selling must be aware of what is happening within their industry. People considering selling should think about the products that fit around their niche.

Even though strategic investors are better negotiators, they will pay more for a good fit.  The key is to show a strategic buyer the big picture, so there needs to be a different sales pitch than for an institutional investor or an owner/operator. It should highlight the value that can be gained by integrating the business for sale with existing business activities faut il une ordonnance pour acheter du viagra en pharmacie.  This can make the sale look like great value.

Reasons Why Strategic Investors Buy

Sometimes buying a business can instantly provide a new product or service than can be sold to an existing customer base.  Research and Development (R & D) and Intellectual Property (IP) protection can be lengthy and costly, and sometimes it is cheaper to buy a company that has already made that investment.

A purchase can provide a new or extended distribution channel.  The key here is that both businesses need to have the same target market, so the products can be cross promoted to a larger database and then distributed to a wider network.

Another reason strategic buyers invest is to lock in supply, so sellers should think about their supply chain.

Creating a brand takes many years and is usually expensive, so acquiring a brand is another reason strategic buyers may invest.

Sometimes people are buying the human capital of the business.  Maybe the buyer needs the management expertise, sales force or technical skills that lie in another company’s employees.

Strategic buyers may see an acquisition as a way to expand into new markets, both nationally and internationally.  State representation can be attractive, as can a presence in regional markets.

A strategic purchase can also provide entry into a dynamic market or sector of a market.

A strategic buyer may be a competitor seeking to reduce the number of competitors in the marketplace. This is a strategy often used by large multinationals, which find it easier to purchase a competitor than fight for market share

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