Why Buyers Buy: 

What Make a Business Attractive?

Cash Flow, 

That Can Be Created,

Even When They Are Not There.

Doesn't that sound attractive to you?

Wouldn't you like to own a business like this?

Sounds pretty magical!

The Thing Is If You Own It, You Don't Have to Sell It

You Can Harvest That Cash Flow For Yourself

YOU Built It, Why Shouldn't YOU Reap the Rewards?

Setting Up Your Business Right Gives You Options.

It's All About The Cash Flow

The primary reason someone buys a business is to get a return on their investment (ROI). Investors invest in businesses to receive future cash flows. You as the owner, presently receive the benefit of the cash flow that your business generates.

Each potential acquisition will be judged on the cash flow the buyer believes the business can generate, the level of risk of achieving the cash flow and the attractiveness of the industry in which the business operates.

Ideally they want to be sure that cash flow will be coming in on a regular basis and hopefully have pretty good growth potential.

The Past is Important

Buyers want to see a sound financial history. They want to see well prepared financial statements detailing the past three years of operating history. Ideally, your business is showing consistent cash flows that are trending positive over time.

Many businesses have issues with their financial statements that create uncertainty about the financial health of the business. This is because they treat the personal finances and the finances of the business as one and the same.

However, whenever there is uncertainty there is perceived risk. Whenever there is risk, there is a tendency for the price for the business to be adjusted downwards. Don't let ambiguity about your financial statement decrease the price you receive for your business.

The Early Bird Get's The Worm

This is a very compelling reason that it is wise to start your exit plan long before you intend to sell your business. You want to take as much risk off of the table as you can, so you can get top dollar for your business.

Attractive businesses can demonstrate a proven track record of success. They have systems and processed in place so that the operational characteristics of the business are transparent.

Potential buyers want a turnkey operation. If they have to figure out how and why you do business the way you do, it puts the stability of future cash flows at risk. A common theme throughout the Value Creation Journey is to reduce business risk as much as possible.

Another key issue that buyers will be looking for is the extent of the reliance on any one business owner (or key person) on the success of the business.

You Can Be The Biggest Obstacle

Ideally, you will have built a business that will run without your day-to-day involvement. If the business is overly reliant on your efforts...you create risk for any potential buyer.

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% of business owners claiming the business totally depends on them and a further 44% saying it does to a major extent. However, 71% believe another person could readily take over the business if necessary.

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

​Don't be an obstacle. Build a business that will run without you. This subtle shift in Mindset can create millions for Value Creation Owners.

Not All Business Are Created Equal

Industry trends also influence buying decisions and business value. For example, businesses that operate in a growth market will usually be more valuable than businesses that operate in a less buoyant industry as they have higher chance of continuing to earn the same or more profits.

Since potential buyers assess any business through the filter of risk, if the business is well organized 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 are you selling?’ and an owner needs to be able to provide a genuine and credible answer. If your reason is your business is tanking and you want to get out before the ship sinks, don't expect to get very much if anything from a potential buyer.

There are many legitimate reasons for selling your business. These include wanting to retire, wanting to pursue another opportunity, or other more personal reasons.

Due Diligence

One of the hardest parts of selling your business is going through the process of due diligence. Some business owner's compare it to a colonoscopy, only without the anesthesia.

It is like when you sell your house. You and the buyer agree on the purchase price dependent on the results of  an inspection of your home.

Anything that needs to be fixed becomes a negotiation between the buyer and the seller. Either the seller fixes the problem or the buyer demands a decrease in the price.

It works the same way with your business. You agree on the price, then the buyer goes through a detailed examination of your business to ensure that there are no hidden risks that may affect future cash flows.

This is where a well formulated exit plan can pay huge dividends. If you have already addressed risk factors in your business model, then it is unlikely that any unforeseen risks will be uncovered in the due diligence process.

The more prepared you are, the higher the price you can expect from selling your business.

Types of Business Investors

​Owner/operators are one type of investor. The attractiveness of the business will be one of the most relevant  reason they are buying. They often like to buy businesses that have something in common with their hobbies or leisure interests or they are looking to grow companies that they have already had success with.

Within the owner/operator category, there are essentially two types of buyers. These include buyers who are purchasing for leisure and hobby reasons and those who are buying to build a bigger business.

For example, an owner/operator might buy a golf course because they enjoy golfing.  The average spending of these buyers would be $100,000 to $1,000,000 and any business for sale over this price range may be unattractive.

A plumber who wishes to grow his company larger could be looking for other plumbing companies to expand the footprint of their operation.

Owner/operators who are buying to get ahead will be after maximum returns. Their choice of industry is dependent upon growth, profitability and their experience. They are not concerned about working hard or long hours as long as there are solid returns.

A multinational or large company that buys a business for strategic reasons (strategic buyer) will rarely spend under $1,000,000. A multinational would not look at a business unless it had enough profit and upside to justify the stringent due diligence, legal and accounting fees required.

A strategic investor (a large business that buys another business) is generally looking to either expand or eliminate a competitor. They might see the strategic benefits of the following:

• Products or services to add to their base
• Intellectual property
• New distribution channels
• Locking in supply
• New ways of approaching customers
• Management expertise
• Brand expansion
• International expansion
• Competitor buyout
• Employee skills

Baby Boomers Are Currently Buyers & Sellers

There is a current trend for American company's to lay off workers in their fifties.  These individuals are essentially looking at buying a job in an industry in which they enjoy working and they can continue to provide for their families. 

They want good profits and a job that is not stressful in a situation where they don’t need to work too hard.

Hopefully at this point in the conversation you are starting to think about how you stack the deck in your favor. If you want to be in the top 20% of business owners that have a successful exit from your business, read on.