Top 10 traits of an attractive business for sale

1. Profitability!

Ok, let’s start with stating the obvious, who’d have thought it, profitability does make a difference to the attractiveness of a business for sale! Indeed, many businesses are valued on a multiple of their annual maintainable profits leading into a sale so, if you want a great price, you’ve got to keep working hard in your final years. We sometimes find that, consciously or unconsciously, sellers take their foot off the pedal in the period leading up to a sale and the resulting loss in profitability damages the final sales price. Using an analogy of a 100 metre race, you’ve got to sprint straight through the finishing tape; don’t ease off in the final metres.

2. No reliance on the owners

A primary fear of most buyers of a business for sale is that, when the sellers leave, the goodwill walks out the door with them. If all of the important operational knowhow, from intimate knowledge of how the franking machine works to crucial business relationships with key customers, is held by the owners, the business is likely to struggle under new ownership. Whether you intend to sell your business or not, it’s good business sense to delegate and share as much of this information as possible throughout your teams. This gives the business a great chance of leveraging growth organically, but also means you have a potential management buy-out team in the future to sell to, or indeed you can simply step away from the day-to-day operations of the business and receive a healthy dividend stream from the profits generated.

3. The business for sale demonstrates growth

Profits are important, but their direction of travel is of equal importance. An upward trend over the last two or three years is likely to reassure buyers that the business hasn’t yet reached its ceiling and further growth is achievable without considerable further investment. Even better, if this is the case, put together some financial forecasts which show how you expect the profits to grow in the next few years. A buyer won’t do this for you so, if you want this growth factored into the price, you’ve got to put the work in.

4. Genuine opportunities for further growth

The most attractive businesses for sale offer buyers genuine opportunities to grow the profits under their ownership. Such opportunities need to be well thought through and reasons need to be given as to why you haven’t already done it yourself. Simply saying that buyers could introduce an extra sales person or widen the geographical spread without demonstrating how this could be done, and the value it would derive, is likely to be ignored by buyers. It’s much more powerful to explain to buyers your proven ongoing marketing strategy, suggest other businesses that could be bought to compliment your own, or highlight likely cross-selling opportunities for certain types of buyers.

5. Paperwork up to date

Regardless of how attractive a business for sale might be, no one wants to step into an administrative nightmare the moment they’ve bought a business. You need to demonstrate that you are up to date with key management information and tax and regulatory compliance. Most buyers will undertake some detailed due diligence before buying a business, so get your paperwork under control. And if nothing else, it’s good business sense.

6. Motivated sellers

You need to be genuinely motivated to sell your business. The work involved in a sale is easy to underestimate. There will be dozens of meetings to attend, reams of information to collate, legal contracts to review, and, dare I say it, some professional fees to pay! The experience can be a rollercoaster of ups and downs, and there’s often some soul searching along the way as you contemplate a new life after the sale. All of this needs to be done whilst you’re still working hard to keep the profits up (see point 1 above). Similarly, buyers will be investing lots of time, effort and money into getting the deal over the line, so if they get the impression that you’re not truly committed to selling, they may simply walk away.

7. No particular reliance on key customers or suppliers

If a high proportion, say 20% or more, of your sales is from one customer, buyers will perceive this as a risk. If they lose the customer it can turn a profitable business into a loss-making business overnight. The same applies to dominant suppliers. Where possible, diversify your customer and supplier bases so that this risk doesn’t apply to your business for sale.

8. Repeat income streams

The value of profit is not always equal. Think about it. A business which makes, say, £1m profit from a few large one-off sales is not as attractive as a business which makes the same amount of profit from a diverse range of customers locked into long-term recurring sales. The risk profiles are completely different. The lower the risk, the higher the price. So, wherever possible, focus on attracting repeat custom, ideally under a fixed or rolling contractual basis.

9. Internal control

An attractive business for sale needs robust internal controls. For instance, a buyer will be interested in whether there are segregation of duties within the accounts department, reducing the threat of mistakes and, worse still, fraud. What about internal system manuals to make sure a consistent approach of best practice is applied across your business? If your business doesn’t already follow ISO quality standards, or something similar, then this could be an opportunity to improve the business.

10. Minimal fixed costs

Fixed costs are those that generally aren’t affected by the level of your sales activity, such as rent, council tax, light and heat, etc. The lower your fixed costs are, the less profit you need to generate before you break even and then start making a profit. Generally, those businesses for sale with a lower fixed cost base are more attractive as they are less risky for a buyer.

If you’d like to explore the potential sale of your business, please get in touch.

Call 0330 024 0888 or email corporatetransactions@larking-gowen.co.uk

Next month: Top 10 differences between you selling the shares in your company v the company selling its trading assets and goodwill