When buying a business, buyers and their representatives (agents,lawyers) create a short list of a specific set of criteria. Among them are:
- More Cash and Less Inventory
- Positive Long-term Contracts
- Diversified Base of Customers and Suppliers
- Solid Capture and Retention of Order Data
- An Audit for the Prior Five Years
- A Strong Management Team
Not all may apply to your business but probably most do.
More Cash and Less Inventory
Buyers like to see a strong cash position. This comes from smart management of working capital. The seller can increase their cash position by:
- Collecting accounts receivables faster
- Clearing inventory that is not moving
- Obtaining the most favourable terms for payment from suppliers
Positive Long-Term Contracts
Long term contracts reduce volatility and uncertainty.Buyers will focus on confirming the sustainability of production. Long-term contracts examples are
- long-term supply contracts
- leases on valuable land and buildings
- leases on production facilities and distribution.
Diversified Base of Customers and Suppliers
The seller should not be dependent on major customers for a large portion of their sales because customers can put pressure and threaten to withdraw their business.
The opportunity to supply a major retailer (i.e. Wal-Mart or Home Depot) or a major manufacturer (Ford or GE) can be a tremendous opportunity for a smaller company, but it can also drain a lot of resources and result in pressure on margins and tremendous customer concentration. While the growth that it drives will increase value, the associated risk of these revenues will reduce value.
Similarly, consider the relationships to suppliers. How dependent is the business on the supplier? How reliable is the supplier?
Capture and Retain Order Data
Without this data, it’s difficult for a buyer to understand how the current sales pipeline compares with previous periods, making it challenging to gauge growth.
Get an Audit for the Prior Five Years
Buyers will expect to see several years of audits performed by a public accounting firm. An audit further lends credibility to our company’s financials and decreases the likelihood that a generally accepted accounting principle issue will be uncovered in due diligence proceedings. This type of finding could cause an investor to lower their purchase price.
A Strong Management Team
Companies with strong management teams are generally valued higher than those without them; private equity buyers, in particular, value strong non-owner teams. Since it takes time before new hires begin to contribute to a company’s financial performance, the sooner gaps are filled the better.
It is clear that the preparation for making the business attractive to prospective buyers requires effort. It is an effort well worth while as it will ensure a prompt sale at a high price.