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Value Drivers in Business Sales (3)

Buyers are often attracted to certain businesses for reasons other than reported profits. They will even pay premium prices for businesses if they see other factors that matter to them. Just what are these other factors? That’s what this series of articles is about. Prospective sellers take note!

These “other factors” might be called the “value drivers” (*1) in business sales. For any specific business and for any one buyer prospect, these “value drivers” will be unique. Generally, they can be grouped under seven separate general headings.

What Business Buyers Want

1. Attractive / Interesting Work

2. Strong Market Position

3. Right Location

4. Working Systems

5. Proven Stability

6. Good Books/ Records

7. Reasonable Price & Reasonable Terms

Good Books & Records

If all the other factors above are in place, the business probably also has good books and records. Buyers typically want to see three years of Federal income tax returns for the business, as well as any corresponding financial statements, whether compiled by a CPA, or internal from a program like QuickBooks®, or both.

Buyers like to see detailed sales histories by month and by product line or service, and detail of all the costs and expenses by month for at least the last two years.

They also pay premiums for businesses with good contact manager databases of past and current clients and customers.

We once sold a service business where, because the owner suffered from Attention Deficit Disorder (ADD), the owner’s wife had compiled a super-detailed operations manual. It was this manual of operations and systems that most impressed the buyer. They paid nearly €125,000 in goodwill for the manual alone!

Reasonable Terms

Terms offered by the seller are also critical. The lower the down payment, and the lower the amount of working capital needed, the more buyers there will be who will look at the business.

A business with significant tangible assets that banks will take as security for long-term loans is in a much better position to negotiate a good price.

A business owner who can afford to offer seller financing is in a much better position to command a premium price.

Sellers who run their business as if they are going to own it forever – keeping the pipeline of future business full for a new owner – and who will stay for any needed transition period are also big winners.

Original article by Glen Cooper, CBI, CBA, BVAL

Authorized for republication

(*1) The term “Value Drivers” as used in this article is similar to, but not the same as, the term used in business economic analysis defined as “the economic variables that are critical to revenue and cost functions of the business.” In the real world of small business, though, many of the factors listed in this article also end up fitting nearly the same definition.

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