Every business owner hopes to harvest the wealth locked up in the business. Unfortunately, most owners over-value their businesses. This has an enormous impact on the success of the transition into life after business because owners who count on the business for retirement can experience catastrophic disappointment. According to Christopher Snider, in his book Walking to Destiny (2023), 75% of business owners “profoundly regretted” the decision to sell their business 12 months after selling.

Sean Hutchinson (2023), Partner of Strategic Development at Ready for Next, says this is because the owners were ready to transition but were not transition-ready. Hutchinson reminds business owners that the most valuable businesses are transition-ready due to their attention to operational excellence that affects all seven value domains of a business. Hutchinson contends that businesses add or subtract value daily due to their actions toward each value domain. The value domains are:

• Culture
• Risk
• Strategy
• Productivity
• Financial Performance
• Leadership & People
• Sales & Marketing

For business owners, the key to adding value begins with viewing the company from a buyer’s perspective. Snider (2023) calls this approach a business attractiveness score. This quantitative scoring process can allow owners to get their businesses in shape before they feel the urge to sell, thus unlocking the best value for their business and preparing for the transition to the next chapter of their life.

 

The value domains can be grouped to provide four factors for business owners to consider in their transition readiness. These factors are business factors, forecast factors, market factors, and investor considerations.

The Four Key Factors That Buyers Consider and Their Value Components

Business Factors

• Leadership & People: Buyers want to buy a well-managed business. This means having a team of experienced and capable executives who can execute the company’s strategy. This also necessitates carefully crafted succession plans that optimize a continuing history of strong leadership.
• Strategy: Businesses that don’t rely too heavily on key managers can withstand changes in leadership without too much distress. Owners cannot be the top producers or salesmen in strong businesses because potential buyers understand they will lose customers when the transition occurs.
  • Intellectual property: Buyers value businesses with valuable intellectual property (IP). This can include patents, trademarks, copyrights, and trade secrets.
  • Location and Facilities: Inattention to the business’s facilities can diminish value because the new owners must make costly repairs and adjustments.
  • Operations: Processes and systems should be robust, documented, and up to date. A prospective buyer will begin factoring in discounts to the sale price if the business operations are weak.
• Sales & Marketing: A solid customer base is another essential value driver. A large and loyal customer base likely to continue doing business with the company is crucial to a successful transition. The customer base should also be broad, not concentrated on a few large contracts. Buyers also want strong brand awareness to build on the company’s reputation.

Forecast Factors

• Financial performance: Buyers want to see a business with a solid financial performance history. This includes factors such as revenue growth, profitability, and debt levels. Buyers will seek a long history of continuous growth and a solid recurring revenue model.

Market Factors

• Productivity: Buyers are also interested in businesses with potential future growth. This can be assessed by looking at factors such as the size of the market, the competitive landscape, and the company’s products or services and comparing these to the current productivity of the business. Businesses maximizing their market and being competitive now will likely sustain that into the future.
  • Industry trends: Buyers also consider the overall industry trends when evaluating a business. This includes factors such as the industry’s growth rate, the competition level, and the regulatory environment.

Investor Considerations

• Risk: Each company has its own risk inherent to its market. Companies with a proven track record of mitigating risk are favorable investments to buyers. Risk mitigation occurs by following documented compliance measures, developing succession plans, and evaluating buy-sell agreements. Competitive companies are those with low legal susceptibility, appropriate insurance coverage, and strong community support.
• Culture: A company’s culture is its lifeblood. Companies with low morale, poor communication and problem-solving, and ineffective management will likely score poorly in attractiveness to buyers. A strong culture is born from ensuring the right personnel are in the right positions within the company. The culture grows as employees see themselves as part of a team that aims to serve the customer base and grow the business enterprise.

Here are some additional tips for business owners who are thinking about viewing their company from a buyer’s perspective:

• Be realistic about the business’s financial performance and operations when self-evaluating.
• Remember that exit planning is a good business strategy because it focuses on value.
• Get professional help from a Certified Exit Planning Advisor (CEPA) at Whalen CPAs.

Businesses can make themselves more attractive by understanding and improving the factors influencing buyers. Thinking about your business as if you were going to sell it will help you maximize the proceeds when you are ready to sell. Maximizing the profit from the sale of your business can help you transition well into the next great chapter of your life.

 

Resources
Hutchinson, S. (2023, August 22). Value Enhancement Process [Presentation] CEPA: 2023 August, Online.
Snider, C. M. (2023). Walking to destiny (2nd ed.). Think Tank Publishing House.

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