How Can I Build A Business That Is Buyer Ready?

By Generational Equity

09/26/2016

This is a question we encounter quite frequently when we meet with business owners at our exit planning workshops. Certainly the answer to this question varies greatly from business to business; some are better prepared than others to enter the market and negotiate with buyers. However, in general, after working with clients for as long as we have, we have found several characteristics that are common to buyer-ready businesses. In general, businesses that are buyer ready have:

• Prepared internally for a transaction
• An external orientation
• A documentable sustainable future

Inward Looking

Internal preparation is quite simply taking strategic steps to better prep the business for the eventual owner exit. Some key things to consider as you prepare your company internally include:

• Develop a solid middle-management team (reduce owner dependence)
• Document what your company does right
• Highlight who your skilled, key people are in your organization
• Know your company’s BEV (business enterprise value)

Each of these is equally vital but it is perhaps the last one that business owners prepare for the least. Ask any entrepreneur what his/her business is worth and most will be able to come up with some sort of answer; however, most answers are usually far from accurate though because they are based either on antiquated industry valuation methods that do not address the uniqueness of any business and/or are numbers some competitor provided at a trade show five years ago after 2-3 cocktails. Neither of these methods are defensible when negotiating with buyers and certainly are not wise to use when approaching them.

That is why each and every Generational Equity client goes through a thorough business evaluation prior to going to market. This allows us to provide the owner with a solid idea of the business’s enterprise value (BEV) and enables them to decide if now is the time to move forward or, in some cases, if they should enter our hold-and-grow program for sale at a later date when the BEV has improved. The evaluation is a key decision-making tool.

Outward Facing

The second major buyer-ready builder above is having an external orientation. This is simply a fancy way of saying:

• Know your market position
• Who are your customers today and who will they be tomorrow?
• Develop a brand that is identified with your business

Of these three, the one most owners struggle with is the second: planning ahead for customer growth/evolution/changes. This is very, very important to buyers. Far too often we encounter business owners that have become complacent in their sales and marketing efforts. This usually leads to customer concentration (that is defined loosely as any company generating over 20% of an entity’s revenue annually).

You may be justifiably proud that Blue Chip Company XYZ now generates 50% of your business; it proves you provide great service and products, you say. Buyers usually take an alternate view and ask, why should I reward you and pay top dollar for your company when you have done little to develop alternate revenue sources? So if you find yourself heading down the path of dependence on a few revenue sources, be sure to diversify and renew your sales and marketing efforts.

Explain the Past, Document the Future

Finally, it is vital that you can document the ongoing sustainability of your business. This means:

• Develop revenue streams that are recurring
• Insulate your organization from future threats
• Diversify your customer base
• Diversify your supplier base
• Promote and reward your best and brightest innovators

The last point in this list is perhaps the most challenging for entrepreneurs and it goes back to a point made above about highlighting who the skilled players on your team are: make sure that the business is not all about you. You may in fact be a genius in your industry. However, buyers are not buying you and what you have done, they are acquiring the future earnings of the company and those earnings are dependent on far more than you, especially if you are exiting in the next three to five years. So hire, train, and mentor the best and brightest to eventually REPLACE you. Buyers will certainly reward you for that.

Time and space do not allow me to expand fully on all three of these buyer ready business concepts. If you would like to learn more, you have two options:

• Download our complimentary white paper entitled “Building And Exiting A Desirable Business”
• Attend a Generational Equity exit planning workshop

If you would like further information on either of these, please call me at 972-232-1125 or email me at cdoerksen@genequityco.com. I will be glad to share more about what building a buyer-ready business means to buyers and answer any questions you might have about our services.

By Carl Doerksen, Director of Corporate Development at Generational Equity.

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