How to make your business attractive to buyers

For business owners planning to sell, one of the most pressing questions is: how can you make your business as attractive as possible so that you can find bidders who will offer the best price?

However, finding buyers who will match the owner's desired valuation of the business can be a very difficult task, especially in conditions of economic and political instability in many countries around the world.

Economic instability negatively affects the process of selling a business from the sellers' point of view. Many buyers are reluctant to put money into deals, and those who do may target distressed acquisitions or push for lower business valuations.

For this reason, it is critical for business owners seeking a profitable exit to ensure that their company is prepared for sale and that serious work has been done to make the business as attractive as possible to potential buyers.

Careful exit planning

The first thing you need to do is make the business more attractive before selling — this is a well-planned exit strategy. This means a careful approach to the sales process and allocating the necessary time for it, at least three years, and ideally — up to five years.

It will take years of strategy and effort to sell properly. By devoting this much attention to the sale, the seller will give himself the necessary time to create value and take steps to help make the business as liquid as possible.

Consulting with an exit strategist from the very beginning of the sale process can help identify problem areas so you can address them and prepare your business for sale. Many exit strategists use a “business attractiveness index.” It is a list of criteria that increase its liquidity. A higher final score indicates that the business is of interest to potential buyers and is therefore ready for sale. At the same time, a lower score indicates that the business requires improvement to become attractive to buyers and is not ready to enter the market.

A well-thought-out exit not only increases the marketability of the business before the sale process begins, but also leads to a more successful and profitable sale. This demonstrates to buyers that work has been done to prepare it for sale, that the owner is serious about their exit strategy, and that everything is in place for them to move in. In a market where there is so much uncertainty, this certainty will be very tempting for buyers and will have a positive impact on their valuation.

Zoom in

Scaled business — it's a more interesting business, so scaling should be at the core of any strategy to make it more attractive to buyers before selling. Scaled companies are larger and likely to be more profitable, making them easier to sell.

In the current environment, buyers want their acquisitions to generate value quickly, and they will pay particular attention to this during the due diligence process. So the deciding factor will be post-deal integration and how long it takes for the new acquisition to become a full-fledged part of their business.

When a business scales, it already has systems in place to facilitate a smooth transition: a predictable revenue model, productivity, a strong leadership team, solid online traffic and process documentation.

Such features will make the business more sustainable, easier to transfer to a new owner, easier to integrate, and able to attract a higher sales ratio.

Increasing market share and diversification

Resilience will be key for companies looking to maintain growth during the economic downturn and accelerate it during the subsequent recovery. The best way to achieve sustainability — is to have a business with a strong market share in its industry and/or with diverse sources of income that make it less vulnerable to economic shocks and allow it to take advantage of growth opportunities.

Many owners, when becoming owners of a new company, are afraid of the fragility of relationships with clients. Especially in smaller firms, clients may have a close, long-standing relationship with the previous owner, built on many years of cooperation, trust and mutual understanding that have developed over time.

Changing ownership can cause anxiety among customers. Often they will use this as an opportunity to renegotiate their contract with the company and perhaps find a different supplier. Buyers, of course, will try to maintain these relationships, but at the same time they will be afraid that clients are guaranteed to remain with the company after the sale.

If the acquired company is overly dependent on a few clients — for example, if one client provides 40% of the company's revenue, — buyers will be concerned. Any disruption in this area will seriously harm their growth strategy after integration.

Similarly, a company may have a large portfolio of clients, none of which contribute too much of a percentage of revenue, but the base may be narrow in terms of the industries from which the clients come. This may be a concern for potential buyers during downturns and recessions when specific industries may suffer (for example, the wave of construction bankruptcies seen in the current recession).

To ensure a business is attractive to buyers, owners should strive to create a stable customer base with a high level of recurring revenue. This may mean a significant market share in one particular industry or a diversified operation that is not dependent on one particular customer or sector. This protects the business from economic shocks and ensures that during a change in ownership, the loss of one or two customers will not have a devastating impact on the company's revenue streams.

Strengthen customer relationships and lay the foundation for sales

Buyers will find a business more attractive knowing that customer relationships are strong and stable, that customers are prepared for the business to be sold, and will not be shocked by a sudden change in ownership.

During a change in business ownership, what will most reassure clients is openness and transparency. If customers are not aware that a business is for sale until the transaction begins or even after the transaction is completed, they are likely to feel discouraged and may be forced to reconsider their relationship with the business.

Potential buyers will likely want to find out whether customers are aware that the business is for sale and whether they have been kept informed of all developments. If this is not the case, buyers may back out of the deal due to the possibility that valuable relationships could be significantly damaged during the transition period.

Sellers should communicate to clients that they wish to sell the business during the process and assure them that they are seeking a buyer who will maintain the same level of service after the transition and that best efforts are being made upfront to ensure that the integration process The transaction went as smoothly and without glitches as possible.

Once customers are satisfied that the sales process is going well, salespeople can try to secure important customer relationships by negotiating new contracts. This will make the company much more in demand for potential buyers. It will also demonstrate the long-term stability and growth potential of the business and reassure them that important relationships will not be lost once the acquisition is completed.

Sellers can also try to make their business more attractive to buyers by including proposals for increasing sales to existing customers and strategies for attracting new customers into the business plan for the company's possible future.

Detailed financial history and extensive forecasting

One of the main reasons why it is important to spend a long preparatory period when selling a business — this is that it allows the company to focus on increasing turnover and profitability. These are the most important characteristics that will make a business more attractive to buyers.

If a company can show growth over the last three years of its financial statements, buyers will be confident that it is on an upward trajectory. They will also be confident that it has a strong management team and strategy to steer the business in the right direction.

Of course, it may not be possible to have a perfect financial history in the years leading up to the sale. Some countries have been in a state of economic turmoil for several years that was difficult to predict (including after the coronavirus epidemic). Even businesses with high growth potential sometimes experienced difficulties and recorded losses.

But if a business makes losses, it can still demonstrate an increase in turnover and key indicators. For example, such as concluding new contracts, current favorable conditions with existing customers, developing innovative products or new acquisitions.

Key point — transparency. The last thing owners seeking to exit a business should do, even if their company's latest financial statements show losses, — is to try to hide these facts from potential buyers. Such dishonesty will be revealed at the due diligence stage, which can fatally undermine the buyer's trust.

If a seller is transparent about its performance and provides detailed and accurate financial statements that truly demonstrate the performance and trajectory of the business, this builds trust. In this case, the buyer is more likely to participate in the process. During an economic downturn, factors such as the percentage of recurring revenues and the diversity and sustainability of revenue streams may be more important to buyers looking to assess a business's performance than profit or loss figures.

More important than demonstrating past profitability, however, buyers will be most impressed by a detailed, ambitious growth strategy that details the business's current plans and where it is headed. The focus should be on financial projections for the next 3-5 years. They require metrics such as historical results, market trends, and forecasts for what is in development, such as new products or services that the company seeks to bring to market.

In many ways, the scaling process that precedes the sale of a business can be used as a starting point for where the business can go after the sale. The new owner will likely have his own ideas and strategies for where he wants the business to go after the acquisition. But the development plan developed by the outgoing owners can nevertheless also be attractive.

First and foremost, it can demonstrate the potential of the business, especially if the intended growth trajectory is based on a compelling history of earnings growth. Even if a company already has its own plan, an inside look at where the business might be heading can shed light on ideas, growth strategies and expansion opportunities that may not have occurred to them yet.

But it is important that these forecasts for the future are not “rosy”. Avoid football predictions! They will cause a potential buyer to ask, “Well, if your forecasts are so impressive, why are you selling the company now?” They want to see the solid assumptions behind the extrapolated forecast of your recent growth.

Equally important, equally impressive and equally valuable to the new owner will be a thorough analysis of the potential risks that the business may face. This can help buyers plan their growth strategies more effectively and, although it may seem counterintuitive, perhaps even increase their confidence in the acquisition.

Strong leadership and continuity

One thing that will immediately alert a potential buyer conducting due diligence of a possible target business is — if the company appears to be overly dependent on an owner (or owners) who plans to leave the business after the acquisition.

An acquirer may come to a new acquisition with plans to bring in its own people, especially if it has extensive experience in the same industry and a leadership team in its own business that can take over the management of the new acquisition.

However, even if the new owner plans to make changes, including changes to the management structure, he will still be concerned about excessive dependence on the outgoing owner. His assessment of the company (or even his interest in concluding a deal) may be accordingly changed not in your favor.

One common method of determining how dependent a business is on the owner is to have the owner think about what would happen if he took an extended vacation. If he had taken three weeks off or an even longer personal leave, would the business have continued to operate and be in good shape upon his return? If not, then most likely the company has no other leaders and is relying too heavily on its leader, which will not please customers.

On the other hand, a company with a strong management team that operates without the constant day-to-day involvement of the owner and can take over in the owner's absence without significantly impacting operations or earnings will make the business much more attractive to a potential new owner.

If a potential acquirer was looking to make changes at the top level of the company after an acquisition, a particularly strong management team may mean that he will have to make fewer changes than expected, or even convince him that no changes are required.

This can make the business significantly more attractive to them and have a positive impact on the company's valuation. A strong, established management team will contribute to a smoother post-transaction integration. This will allow you to quickly reap the benefits, and will also save the new owner money that he could have previously invested in reorganizing the management team or hiring new specialists.

Prior to a sale, a strong management team can also help implement initiatives to increase the overall value of the business. Having a staff with a wide range of knowledge and experience is the foundation of any successful scaling strategy. And the process of increasing business value depends on experienced individuals who can offer many different points of view and ideas.

Get your financial affairs in order

For buyers, one of the most onerous aspects of an acquisition is the due diligence process. It is often the most time-consuming stage of the transaction and requires the most work. If the target company's documents, such as financial statements, are poorly organized, acquirers or their representatives will be left scrambling to piece together a picture of its past performance.

Poorly organized financial and other documentation will not only increase the buyer's due diligence burden during the acquisition, but may also indicate deeper disorganization, which is likely to spread to other areas of the business. This can greatly spoil the buyer's perception of the business and, accordingly, affect his assessment and willingness to participate in the sales process.

For this reason, the company must have at least documents for the last three years. These include management accounts, profit and loss statements, cash flow statements and balance sheets. They should be well-documented and easily accessible to buyers who have reached this stage of the process (that is, after initial negotiations and the signing of a non-disclosure agreement). The seller can also work with the financial advisor to prepare a summary document containing the most important figures from the financial statements for previous years, which will make it easier for buyers and their lawyers to work through the complete package of documents.

Other documents that will be reviewed during due diligence include corporate structure and accounts, bank details, customer contracts, detailed breakdown of company assets and intellectual property, insurance policy documents and certificates, relevant industry compliance and consent requirements companies, employment records, tax documents, property information, employee benefits, etc.

Sellers who have been involved in the full sales process for three to five years should begin preparing for due diligence from the very beginning. Preparing all necessary documents for review by potential buyers will ensure a smoother and faster due diligence phase. This will also give buyers the impression that the business is well organized and the seller is serious about selling it.

Reasons for sale

Of course, buyers will be able to formulate their own understanding of the performance and growth trajectory of the business during the due diligence stage. Buyers are also particularly interested in the reasons why the owner is selling the company, as this may indicate deeper problems within the business.

The reasons for selling should be the very first step in the process and determine whether the timing is right. If a business is underperforming, the economy is weak, and the company's growth forecasts are not being met, then it may be natural for owners to look for a way out if they feel they are not up to the task.

However, the sale is in desperation — It's a bad idea, and trying to sell an underperforming business while apparently seeking a quick exit will not attract the kind of buyer that will satisfy the owner who is evaluating the company.

Of course, buyers know that the owner wants to get out of business — otherwise they wouldn't bother selling. Desperation to exit the business indicates that the business is struggling and lacking direction, and paints a very unattractive picture.

Buyers need to be confident that the owner is selling for a legitimate reason, and sellers can maintain the attractiveness of their business by selling at the right time and having a compelling reason to exit the company and hand over the reins to someone else.

Retirement is a legitimate reason to sell, and the seller may begin the process of exiting the business several years in advance, when retirement is still a long way off. Such a move could dispel the perception that the aging owner is desperate to get out and stop working. Framing retirement selling as a process to find a young owner ready to take the business to the next stage of growth may be one method that will help both attract buyers and preserve value.

A business will be most attractive to buyers if it offers the opportunity for growth, and this is a particularly effective way of identifying reasons to sell. The best time to sell — this is when a business is ready to enter a new phase of growth or has the potential for significant expansion, but this requires new investment from a well-capitalized buyer. Sellers need to ensure that their forecasts are based on reliable data and careful consideration of the business's growth prospects, as well as broader economic/social factors and potential risks.

By preparing a business plan during the sale process that outlines positive financial projections, growth strategies, and areas in which the business can expand or diversify, owners can demonstrate to potential buyers that they are selling the business to unlock its potential and improve profitability.

Flexibility regarding deal structure

With today's economic and political situation in the world, buyers will be more restrained about investing their money in expensive purchases. It's true that the best deals usually come during recessions and recessions. It is also true that buyers will tighten their due diligence procedures even more and will pay even more attention to those transactions that will quickly bring significant profits.

Two main factors are seen as the main barriers to deal-making in the current environment for both buyers and sellers: tightening financing conditions and the valuation gap. Given the uncertainty that continues to plague the economy, as well as other concerns such as inflation and rising costs, company valuations have dropped significantly.

Traditional lenders such as banks have tightened financing terms, and while private equity firms remain willing to provide funds to M&A buyers, competition for such support will be fierce and not all buyers will be able to obtain it.

As a result, sellers may have difficulty finding buyers willing to meet their valuation of the business. Or even if buyers are willing to pay a higher valuation, it will be difficult for them to differentiate themselves from other similar companies on the market.

To make a business more attractive during periods when buyers are either less motivated to enter into high-value transactions or have difficulty accessing the necessary financing (or perhaps both), sellers can offer flexibility in the financial or operational structure of the transaction . It can make the purchase more affordable for buyers and potentially allow them to get a higher final appraisal.

From a financial perspective, offering the seller the missing financing or possibly structuring part of the deal price as a trade-off can attract buyers with a smaller down payment. This also potentially means the deal's overall valuation could be higher. The disadvantage here is that the seller may assume a significant portion of the risk if the business does not perform after the acquisition, which may limit the amount of payment deferred. This means that sellers should seek favorable terms and only use this transaction structure if they are confident in the future of the business and the competence of the future owners.

From an operational perspective, buyers may be more interested in a transaction if the outgoing owner agrees to continue with the business for a pre-agreed period after the acquisition. This can significantly ease the transition period after the transaction and allow the new owner to quickly get used to running the company.

Such measures will significantly increase the value of the business, facilitate its transfer and make it more attractive to buyers. Business owners also need to be transparent about their operations and, if the right buyer comes along, be flexible and cooperative to achieve a successful sale.