When buyers look at a business, they are not usually buying what the seller thinks they are selling.
Sellers often talk about the opportunity. If we advertised more. If we added another truck. If we hired more people. If we expanded into this market or that market.
That may all be true. Most businesses have potential. But buyers generally do not want to pay the seller for potential the buyer still has to create. Potential has to be realized before you get paid for it.
What buyers really look for is much more practical.
The first and most important thing is cash flow.
After the business pays its expenses, how much money is left over? In smaller owner-operated businesses, we usually call this Seller’s Discretionary Earnings, or SDE. In larger businesses, the more common measure is EBITDA.
The two numbers are roughly comparable, but there is an important difference. SDE assumes an owner-operator is involved in the business and includes the owner’s compensation as part of the economic benefit. EBITDA is more commonly used when the business is large enough to have management in place, including a general manager or CEO.
Either way, the key issue is the same. How much cash does the business generate?
Buyers also want consistency. A business with stable earnings is more attractive than one where the numbers zigzag up and down. A business with steadily increasing earnings is better still. Declining financial performance is obviously not ideal, and even inconsistent performance can make a buyer nervous.
Recurring revenue, long-term contracts, repeat customers, and a predictable pipeline all add to the attractiveness of a business. Buyers like to feel that the revenue will continue after closing.
The second thing buyers look for is solid staff.
A business with well-trained employees who have been there for a long time is much easier to sell than one where everything depends on the owner. Cross-trained employees are even better. If people inside the business can step into different roles and keep things moving when the owner is absent, that reduces buyer risk.
The less central the owner is to the daily operation of the business, the better.
This does not mean the owner cannot be important. In most privately held businesses, the owner is important. But if the business cannot function without the owner, then the buyer is not just buying a business. They are buying a job, and a risky one at that.
Family members in the business can also create uncertainty. Will they stay after the sale? Can they be replaced? Are they being paid market compensation for the work they actually do? Buyers will ask these questions.
The third thing buyers look for is good books, records, and systems.
A well-documented business is much easier to take over. Clean financial statements, accurate tax returns, organized records, written procedures, customer lists, vendor information, employee records, equipment lists, and operating manuals all matter.
The better the documentation, the less the buyer has to guess.
And buyers do not like guessing.
The fourth thing buyers look at is the overall condition and position of the business.
Is the business in a growing industry or a declining one? Is the business location important? If it is, can the buyer secure long-term occupancy? This is especially important in SBA-financed transactions, where the buyer typically needs at least ten years of occupancy through a lease term, options, or some combination of both.
Buyers will also look at the condition of the equipment. Has it been maintained and modernized, or is the buyer going to face major replacement costs shortly after closing? Old equipment is not always a problem, especially if it is well maintained and does the job, but a buyer will factor future capital needs into the price they are willing to pay.
In the end, buyers are looking for a business that produces dependable cash flow, has good people, keeps good records, and can be transferred without everything falling apart.
They are not buying your optimism. They are buying what has already been built.
If you are considering selling your business in the next three years, now is the time to start the conversation. The earlier you understand what buyers will look for, the more time you have to address the issues that may affect value.
Initial consultations are always free, but valuable.
You can schedule your free no obligation consultation at this link or just give us a call at 904-990-4509