Succession — The Sale of Your Business

Finding an external buyer that will not only meet your financial objectives but also take care of your legacy, employees, customers, and suppliers is not easy. By defining your financial and non-financial objectives right at the outset, you increase your chances of finding the right buyer. Without them, you risk attracting buyers who will likely undervalue your business and not share your vision for its future.
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When you make the decision to sell, the objectives above help you find the right buyer. However, it is also important to understand what buyers look for when considering a potential acquisition. So, to help you increase your chances of finding the proper investor for your business, we’ve listed some of the key factors that can either increase or decrease the value of your business – along with potential transition risks that can make your business less saleable.

Value Boosters

When thinking of boosting the value of your business, consider the following questions:

• Do you have a consistent and predictable cash flow?
• Do you have multiple longer-term customers with binding contracts?
• Do you have a unique market position when it comes to patents, technology, brands and/or licenses?
• Do you have limited offshore competition?
• Does your industry have significant barriers of entry?
• Does your platform have potential for future acquisitions?
• Are you a market leader in your industry or niche market?
• Is your industry facing consolidation?

If you’ve answered “no” to most, or even some, of these questions, then you may need to make some changes to boost the value of your business.

Value Detractors

You should also watch out for possible value detractors that can make potential investors look the other way. Here are some of the questions worth asking about your business:

• Do you have high customer concentration?
• Are you critically dependent on your suppliers?
• Is your financial reporting on the weaker side?
• Are you threatened by offshore competition?
• Do you have limited management depth?
• Is your market potential relatively small?
• Is it expensive for you to expand?
• Do your goods/services require a large amount of capital to produce?
• Do you have significant competitors?
• Is your market concentrated in specific geographic regions?
• Are you in a litigious industry?
• Do you raise environmental concerns?

If your answer is “yes” to some of these, then consider revising your business to optimize its value.

Transition Risks

The points noted above address one of the most important topics when it comes to the sale of your business — valuation. However, it’s worth noting that other related factors are just as important.

For instance, if you, as the owner, are responsible for the majority of management duties, then your departure can leave the company without proper management. You don’t want issues like that to come up because buyers will likely want to be compensated for them, or they may even refuse to purchase your business in the first place.

Here are some questions that you may want to ask yourself:

• Is the goodwill of your business transferrable as opposed to being your personal goodwill?
• Do you have a professional management team that can operate independently from you?
• Are your customer agreements transferrable?
• Do other people have the authority to manage your customer accounts?
• Are your supplier contracts stable and transferrable?
• Have you limited related party transactions and is their market value fair?
• Do you have any relatives in the business and are they are qualified enough to remain with the company after the acquisition?
• Have you ejected non-core assets from your company and created fair market agreements?
• Is your financial reporting timely and accurate?

If you’ve answered “yes” to all of these, then your chances of having a risk-free transition are very high. However, just to be certain, be sure to connect with a third party to review vital accounting policies and conduct more testing on your risk areas. You should also get your tax advisor to evaluate the potential transaction and make sure it’s as tax-efficient as possible.

About Perseus Group

Perseus Group, an operating group of Constellation Software Inc., acquires independently managed software companies around the world. We provide them with the strategic guidance and the financial security that they need to become leaders within their respective markets. We prefer to treat our acquisitions like people, not property. That is why we ensure their growth and development through a fostered culture of sharing best practices. Contact our team to learn more.

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