The second quarter of 2012 saw a 61.8 percent increase in the number of small businesses sold. This is the largest spike since mid-2008, according to BizBuySell. The market to buy is there, but what makes a potential buyer consider your business? A lower-risk opportunity will be more interesting to a buyer, and these tips will help your business to be more attractive.
Transparency in the Financials
If you have any hesitation in showing all of your financial data to a potential buyer, then that’s the first place to start. Get your financial people together, let them know you need to open your books to buyers, and point out the areas where you have concerns.
Do you have a large number of receivables on the books that haven’t been collected? Hire an outside firm to collect on those bills. How healthy is your debt-to-income ratio? If it’s 42 percent or higher, your business could be headed for more financial headaches,writes U.S. News Money. Have an accountant or business financial planner look at your debt to see what could be consolidated or resolved quickly.
A small business can find a large portion of their revenue coming from very few customers. This could be seen as a high-risk situation to a buyer. If more than 10 percent of your income comes from one client, look to diversifying, says Small Business Delivered.
In 1954, the company GM Nameplate was founded to create signs to place on equipment throughout Boeing aircrafts. The company grew in revenue, but recognized 100 percent of their revenue from one customer was not a good idea. The revenue fluctuated based on the Boeing demand, so they expanded services to other commercial areas. Today, they still make signs, but for hundreds of different customers and applications.
If the majority of your revenue is coming from a handful of customers, prepare to justify that decision to any buyers who will see this as a high risk. How is it a good thing for them to buy a company that relies heavily on few customers?
How easy will it be for a new owner to take over your business and deliver the same products and services to your customers, without a big impact on the staff, operations and customers? Fox Business News notes this as a risk, because the ideal scenario is the business continues functioning as normal, while the new owner gets up to speed.
Situations that can create this risk include:
- Poorly documented operations procedures
- Departments that run on “tribal” knowledge, where much is not written down
- Positions that have been long held by one person who may have sole knowledge of that area
Have all of the procedures used in your business documented. Shuffle staff through various positions, so they don’t become reliant on one person. Be prepared to pass on good instructions to a new owner, so they can pick up where you left off.
Be Ready With All of the Answers
Every business has risks, so sometimes the best thing you can do is be open about those areas with a potential buyer. They will decide for themselves if they can absorb the risks. Inc. suggests buyers ask some of the following questions, and you’ll need good answers so the buyer isn’t scared away:
- Has the business ever been the target of identity theft or employment fraud? If so, what steps did you take afterward to protect the company’s assets?
- What easements or right of ways exist that affect the business?
- What federal or local government regulation has the company been in violation of? What plans were put in place to get back into compliance?
- What hazardous substances are in or near the company, and how are they being monitored and controlled?
These risks may have minimal impact on the purchase decision of a buyer if they have all been managed well. Showing evidence to the buyer you’ve been addressing these risks gives the buyer more confidence that the business is a good investment.
Words by Paul Beebe. Paul is a Northwestern graduate with degrees in information science and web design. He recently quit his day job to get his own technology company up and running, and he hopes blogging will pay the bills in the meantime.