As an entrepreneur, having a long-term vision of selling your business is a viable goal. However, it’s crucial to understand the factors that could impact both your ability to sell and the price you can command. By considering the buyer’s perspective, you can better prepare your business for a successful sale. My insights are not just theoretical. I’ve been in your shoes, building and selling businesses. This firsthand experience gives me a unique perspective to offer advice on approaching deals from both sides.
Let’s look deeper at some of the most critical factors buyers consider that can constrain your dream of selling your business at a premium valuation. You can better prepare and strategize for a successful sale by understanding these factors.
1. The founder (you) is indispensable.
Entrepreneurs are special. Not everyone can get a business up and running. The catch to this formula is that the founder and their skills are often indispensable to the business, especially in a growth stage. Maybe you are the top salesperson or lead engineer. Or maybe you have a knack for marketing. The problem is that when you look for a buyer, they’ll first notice how critical you, as the founder, are to the business. That will either cool them to the idea of buying the business or, at best, it might mean that you will have to stick around in the business until the buyer can find a suitable replacement for you.
2. Low profits
We have all seen and read about the so-called unicorn companies that investors plow money into, hoping to scale them into world-class operations. In many of these scenarios, investors aren’t worried about whether the unicorn is making any money. That won’t be the case with your business. A savvy buyer will want to ensure that your business earns healthy profits relative to your industry (and not constrained by too much debt). If you aren’t, you would need to make some changes in your business to improve your margins before looking to sell.
3. High capital intensity
If your business requires massive capital to grow, you might immediately turn off potential buyers. For example, in my book, Great CEOs Are Lazy, I wrote about a steel distribution company that required the business to raise 50 cents in capital for every $1 in sales it booked. In other words, this business needed massive capital inflows to meet the needs of its customers. Unsurprisingly, the business owner struggled to find anyone interested in buying it from him.
4. Undeveloped systems and processes
A key barrier to the growth of many small businesses is a lack of or underdeveloped systems and processes. In other words, as the business expands its sales, it needs more people to do all the work. This is an expensive and inefficient way to grow, and most buyers would turn their noses at a business that couldn’t grow and scale more efficiently by improving revenue per employee, gaining the benefits of scale.
5. Lack of middle management
One area that many small businesses fail to invest in is their middle managers or the supervisory level of their organization. If you haven’t invested in the skills of these leaders, you not only hamper your long-term succession plans but might also negatively impact your culture. As I have written before, you might be able to recruit employees with the company’s mission, but those same people will leave because of their manager. Potential buyers will sniff out these kinds of dynamics immediately.
6. Unorganized financials
I spoke earlier about the importance of having a profitable business. Well, it’s just as important to accurately demonstrate how profitable your business is by having a set of organized financials. Suppose you want to assure a buyer you aren’t hiding anything nefarious in the business. In that case, you will need to have a set of audited financial statements or at least financials that have been reviewed by an outside firm. Ideally, this is also a process you will tackle several years before you decide to sell the business to present a solid track record.
7. Vulnerable business model
It should be obvious that any company with a robust business model will be worth more than a business with a weak or vulnerable one. It’s OK to have a successful business that relies on transactional one-time sales. But you won’t be able to sell that business for as much as someone who has built their business with a high degree of recurring revenue.
Answering the tough questions
I share these seven factors not to dissuade you from trying to sell your business, but more as a guide to understanding why you might not get as much interest from buyers or offers as high as you’d like. The good news is that you can also use this to improve your business in the eyes of potential sellers so that, someday, you can get the outcome you always dreamed about.
