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Thinking Like a Buyer When Building Your Business

By Generational Equity

01/25/2017

Here is an interesting concept and one that we emphasize heavily to business owners who attend our exit planning conferences: begin the process of building a buyer-ready business the day you open your doors.

Now most business owners are justifiably proud of the company they have created through hard work, dedication, and perseverance. However, building a buyer-ready business is sometimes quite different to simply building a business. And building one that is tailored with buyers in mind requires a strategic vision of what professional buyers are looking for when they make acquisitions.

The idea behind this concept was confirmed recently in an article published by Axial entitled, “Build Your Business With Your Buyer in Mind.” Here is how the idea was described by Axial:

CEOs who have never sold a company before often take for granted that if they just focus on building value in their business, the rest will sort itself out. But even the shrewdest, most successful owner-operators can fail to realize this value if they are underprepared for the unavoidable eventuality of any business — an exit.

Regardless of whether a sale is in the immediate horizon or several years down the road, start thinking of your eventual acquirer as a discrete entity for whom they are building value.

There is an old saying in our industry that goes something like this – there are two types of business owners:

  • Those that plan their exit
  • Those that have to exit

Those in the first group will generally reap greater rewards than those in the second. Where do you find yourself in your exit planning process? Are you planning to create a business that buyers will find attractive, or are you hoping that you can avoid one of the Big Ds for as long as possible (Death, Disability, Divorce, Disinterest and Disagreement)?

Why This Matters

Assuming you realize the importance of planning for an exit from the outset and creating a buyer-ready company, the real challenge is this: if you have never acquired a business before, how on earth can you even begin to think like a buyer will about your business? That is why we meet with as many business owners as we can because the reality is we have the experience and knowledge about what buyers look for in companies; our background allows us to help our clients to create buyer-ready businesses. This is again how Axial describes the situation:

Many will stress the importance of engaging advisors and bankers early in the process for information on what other buyers and sellers are doing. Of course, the more intel you have, the better. But there’s another reason to strike up relationships with bankers in your space.

Helping intermediaries understand the nuances of the industry and allowing them some insight into how you are managing to take advantage of them will make it more likely that your company comes up during their conversations with other buyers and sellers in your market. The more you are talked about, the better: you never know what will pique a potential acquirer’s interest.

I mildly disagree with this last sentence above. A qualified, experienced dealmaker will know exactly what features of your business will “pique” a buyer’s interest. It is the process of first getting to know your company and its unique traits (every business has these); then formulating an understanding of your personal financial goals; and finally helping you to build value into your business that will reduce risk associated with it in the eyes of buyers.

This truly is how you build value: reduce the perceived risk in your business. And I will go one further and let you in on what areas of risk buyers are usually most concerned about:

  • Customer concentration – having a single client generate more than 20% of your revenue
  • Excessive owner dependence – too many decisions are centralized and made by the owner and/or most client relationships are based on owner contacts
  • Lack of recurring revenue – building revenue every year from scratch

If you can begin to focus on these key areas, you will be well on the road to building a buyer-ready business. Interested in learning more? Attending a Generational Equity exit planning conference is the next step. For more information, follow these links:

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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