Privately-Held Business Marketplace Blog

How Salable Is Your Business?

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Last week our weekly blog discussed the ‘Market for Selling Privately-Owned Businesses.’ This week we’ll discuss a topic we briefly touched on last week regarding the ‘salability’ of a specific business. It’s an odd looking word but a very important one when it comes time to sell your business. ‘Salability’ addresses both the market for a specific business (i.e., demand) and the factors unique to that business sale that determines the probability of success.

 

Our business brokerage firm has begun to see measurable improvement in the market since 2010 even though it has been somewhat cyclical over that period. While we have been able to successfully help our clients sell businesses of various sizes, various industries and under many different circumstances, there are some factors that investors and buyers consistently tend to focus on that are strong indicators of the ‘salability’ of a business. 

 

The following list summarizes what I believe are the top factors that affect and influence the ‘salability’ of any individual business. The factors influencing the salability of a business are not necessarily in order of importance because the importance will vary from industry to industry and buyer to buyer but the list should capture those factors that are taken into consideration by most investors and buyers.

 

FACTORS INFLUENCING SALABILITY OF A BUSINESS

 

1.                  Price & Terms – Naturally, price and terms of a business sale are at the top of the list and the first thing any investor or buyer will consider before deciding to look further into a specific business. Obviously, this factor is critical because it is usually a filter used by investors and buyers to determine if further investigation is justified. If the price relative to revenue or earnings are not within reasonable range of market multiples for businesses in that industry or cannot be justified because of some compelling reason, such as above market profit margins or industry leading growth rates, the salability of a business will be severely affected and not get exposure to the full market of qualified investors. 

 

In some cases the terms of a business sale can overcome weaknesses for some of the other factors on this list below. We’ve all heard the phrase, “You name the price, I name the terms.” That philosophy can often lead to an equitable deal. For example, seller financing or seller ‘earn-outs’ are examples of some deal terms that can help to resolve a price gap between the buyer and seller.

 

The key is to get a quality business valuation and meet with a business broker or advisor specializing in business sales and acquisitions.

 

2.                  Depth of Management – Many businesses are far too reliant on the owner for the specific knowledge and/or relationships that are critical to the success of the business. In these situations when the “owner is the business”, the necessary knowledge and customer relationships critical to the business reside with the owner. After unrealistic pricing, this is probably the second largest factor that makes many small businesses unsalable. The value and salability of a business can be dramatically increased by either developing and mentoring key employees that in essence allow you to replace yourself or having an exit plan to bring in a new owner and stay on as an employee for an extended period of time before you are actually ready to retire.

 

3.                  Stability of Earnings – This factor takes into consideration the age of a business, how volatile or stable the earnings have been historically and how the profitability of a business compares with industry peers. To help identify improvement opportunities, benchmark your business growth, profit and other financial ratios against industry peers to identify strengths and weaknesses. Developing sales strategies to maintain stable or growing sales and operational strategies to improve profitability through expense reduction will definitely improve your bottom line, increase value and the salability of any business.

 

4.                  Business Growth – Business development strategies and capital investments that help your business grow faster than the overall industry growth rate will increase the value and salability of your business. The key here is to find ways to have managed growth exceeding your industry peers. In addition to organic growth through internal improvements, explore growth through acquisition as an opportunity for rapid and successful growth.

 

5.                  Customer Base & Concentration – A key risk consideration that significantly affects business value and salability is the degree of reliance on a small number of customers for a large percentage of revenue. While taking on a large customer can be instrumental in growing sales, a disproportionate reliance on one customer is generally viewed as high risk. To the degree practical, it is important to develop a diverse customer base over time and reduce over-reliance on any one customer.

 

6.                  Contracts – The development of customer contracts is a very effective means of increasing business value and salability, not to mention peace of mind. Help your customers understand the win-win that results with long term contracts. It is usually possible to offer better pricing and terms without compromising profits when you can count on annual sales from a customer and more efficiently plan for the delivery of your products or services. In turn, the value and salability of your business will increase considerably because future income streams become less risky and more predictable.

 

7.                  Diversity of Products, Services & Markets – Similar to the benefits of a diverse customer base, revenue that is derived from a diverse base of products, services or geographic markets is also an effective means of reducing business risk and increasing the value and salability of a business. Implement sales plans to develop new markets and/or customers.

 

8.                  Financial Records – The importance of high quality financial records is often overlooked. Increasing the accuracy and transparency of financial records not only helps you better understand opportunities for business improvements, it improves the confidence of lenders and investors, both of which increase the value and salability of your business.