A few weeks ago, we discussed the first step in building a exit your company. In hindsight the title was a bit misleading because the first step in building a buyer ready business begins literally when you open the doors of your business. And it is refined as you run your business over the years by clearly understanding what buyers will find unique and attractive about your company.business. In the piece, we defined the first step as the challenging decision to actually
Management guru Peter Drucker once said:
“The buyer rarely buys what the seller thinks he’s selling.”
This statement implies that the features you find attractive about your company may not ultimately be the same features a buyer finds important. So what are buyers looking for? What makes a company “buyer ready” from an acquirer’s point of view? In general, there are a number of common items that buyers look for when examining acquisition targets. They fall under three categories:
- Internal Preparation – Has the seller positioned the company for sale?
- External Orientation – Has the seller created a culture that looks outwardly?
- Sustainable Future – Has the seller anticipated the future and its changes?
Each of these is equally critical in growing your business into a buyer ready business. Generational Equity recently published an ebook that covers this topic in great detail. I will summarize these three points above.
Internal preparation refers to the actions you have been taking internally to position your company that give buyers a level of confidence that the business will survive your people.. Of the more common steps, one stands out: detailing the skills of your key
Each of these is equally vital but the third one I think needs emphasizing. When evaluating a company, I usually ask to see a list of keyin an organization. Unfortunately, more often than not, the owner typically has a couple of short paragraphs on a few key people and then writes a novel about himself. Business owners tend to forget that even though they may be extremely skilled, what the buyer is buying is the future of your company after you exit. Who represents that future? Your key and their skills, passions, and aptitudes. So as you create your team, be sure to document key employees who do their jobs well (more than just yourself). And after doing this analysis, if you find that you don’t have any key employees that are doing well, then go back to step one above and start there by building a better middle-management team.
External orientation refers to a business that clearly understands the market it serves and industry it operates in. And this knowledge can’t just reside in the head of the owner. Buyer ready businesses have entire teams of people looking outside for opportunities and threats, new lines of business, and potential growth.
Buyers are really interested in seeing companies that understand who their customers are today and who will they be tomorrow. Buyers want to know if the owner and the management team clearly have a three, five, and 10-year strategy in place to evolve as the market evolves.
As you know too well, today the world is changing at a pace that was unimaginable a few decades ago. Twenty years ago how many folks had miniature cell phones that could access the Internet (what was the Internet then anyway?). Ten years ago, who would have envisioned the idea of an iPad or even reading a book via a Kindle? Consumer and client demands are changing faster than ever. You need to develop a team that is anticipating these changes.
Finally, and most importantly, buyers are purchasing your future, not your past. Too often middle-market business owners approach buyers by focusing all their attention on selling them on the past. What they should focus on is the future and where the company is going. Buyer ready businesses do this all the time by diversifying their customer and supplier bases.
Creating a diverse customer and supplier base will help you develop into a buyer ready business. Over the years I have talked with business owners who are proud that as much as 90% of their revenue comes from one leading blue-chip customer. The reality is no matter the quality of the client, a diversified customer base is far more attractive to buyers. Rule of thumb: Try to keep the revenue generated by any single customer/or client at no more than 10% of your revenue (depending on your industry and products/services sold). And, of course, make sure that the relationship with any major client is administered by your key employees, not just you.
We all saw the down side to just-in-time inventory management and the benefits of having a diversified supplier base following the March 11 tsunami in Japan. Buyers will be very concerned if a significant portion of your raw material comes from a single supplier, especially if they are offshore.
Just realize this: No buyer is going to reward you if you have been complacent the last few years and have not sought out new markets, new clients, and new vendors. Your financial picture should also demonstrate that you are not resting on past business by showing a positive trend in both revenue and profit.
Thinking Like A Buyer
Building a buyer ready business, as you can see, requires you to think like a buyer. If you were considering the acquisition of your company, what would you want to see in the business? If you were being asked to invest millions of dollars in a privately held company, what confidence would you want in the sustainability of the business after the exit of the owner? Think about these questions and then apply the answers to your company.
Obtaining the services of an experienced M&A advisory firm is also an excellent way of ensuring that your business is buyer ready. A thorough and complete business evaluation can really open your eyes to issues that you may have overlooked or not even been aware of. An M&A advisor will ask you the same questions that buyers will eventually ask and will probe in areas that will prepare you for the process.
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