What Buyers Want and Owners Often Underestimate
By Holly A. Magister, CPA, CFP®
Without a single doubt, there is only one obstacle or “deal breaker” that I have come across over the years that is insurmountable. And it always surprises the Seller. “What could that be?” you are wondering.
Well, before we get to that, let’s talk a bit about what makes a business valuable after the Seller departs for his/her golden years in retirement.
A Buyer wants a business that will sustain itself in good times and in bad times. Recently, we all have learned what those “bad times” feel like in more ways that most of us can count. Those bad times have brought havoc to virtually every industry across every nation. Long term sustainability requires a business cash flow to have a “quality” about it. Positive cash flow is not sufficient; instead it must be cash flow that will endure. (Cash flow quality will be covered in a subsequent article.)
A Buyer wants a business that is not riddled with conflicts, lawsuits, and the like. Essentially a poor reputation in the marketplace and local business community is very unattractive. Nonetheless, it is typically not a deal breaker. Many Buyers will take on such a challenge hoping their own ethically sound business practices will repair and rejuvenate the business and its future prospect for success.
A Buyer wants the Seller to be truthful about its past operations and future opportunities. This is why we recommend you hire the best accounting firm you can afford to assist you in preparation of your financial statements if you intend to sell your business in the next three-to-five years.
A Buyer wants to know that the day the founding Entrepreneur receives his/her equivalent to the corporate “golden parachute”, that the business will continue to operate without a misstep. Indeed, this is where deals break down.
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In all my years working closely with founding Entrepreneurs, I still find it highly unusual to find one truly preparing their business for that day. Most Entrepreneurs are very good at doing many tasks. You know them too…Jack of all trades! It is their innate ability to do many things well that gave them the courage and energy to start their business in the first place. No one is better suited to succeed in a business endeavor than someone who can handle many tasks coupled with endless stamina. And for most founding Entrepreneurs, delegating anything to others is difficult at best!
Regardless of the stress that delegation to others may cause the Entrepreneur, it is wise and necessary to begin the process of delegation sooner than later. When a buyer looks seriously at a business for its long term financial opportunity, they want a business that operates without the founder. And they want to know that it has been operating without the direct contribution of effort from the Entrepreneur for a reasonable period of time.
When the situation is not one where the business operates through the efforts of key management and other employees, many Buyers lose interest and walk away. If they are willing to take on the challenge to replace the efforts and talents of the Entrepreneur post sale, the price paid is either reduced or contingent on future success of the business. Neither consequence is a good one!
Unfortunately, when the Entrepreneur receives negative feedback from a potential Buyer regarding the need to “replace” the CEO, they often say “I wish I knew the importance of this issue years ago”. Don’t underestimate this matter and be one of those disappointed Entrepreneurs.
Let us know your insights by commenting on our blog post below.
Holly A. Magister, CPA, CFP
Enterprise Transitions, LLP
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