A Financial Buyer Has Little Or No Interest, Ability, Or Time To Be Involved In Operating Or Building Your Business So It Must Run Itself.
A financial buyer wants a smooth transition of ownership, monthly reports, overall control of the bank account, and no surprises. He wants to buy a business that will provide an acceptable return on investment. One that will need no hands on management. A business where remaining management has the talent and the various critical systems, to increase revenue, and increase profit.
Financial buyers want to invest in businesses that will experience growth in earnings, and in enterprise value without demanding much if any of their time. They are happy to act as owners through their board representation. Otherwise they prefer to be passive investors.
When they evaluate a business for acquisition they all have their own specific criteria. Their minimum acceptable rates of return are different. But for purposes of evaluation, they all have them. Their preferred levels of involvement differ. But none want to be involved daily. A financial investor wants any business purchased to let him go to the beach for long periods, without having to worry about the business. Or to add your business to an existing portfolio, and look for more.
Look at your business through the eyes of a financial buyer. If you bought your business, paying all cash, would you find the before tax return it would generate for you an acceptable return on your capital? Remember that it must be able to generate this return without any assistance from you. Financial buyers usually need to have confidence in future earning projections. They use these to determine the return on capital that the business will generate.
If you didn't own the business, would you have confidence in the various systems and processes that are in place, so that you would experience no unpleasant surprises? Do the systems and processes cover most if not all foreseeable contingencies? Are your employees well enough trained, and independent enough that they would give you the confidence to go for a long vacation without worrying about the business? Do you have confidence in future earnings projections? And if past earnings have fluctuated wildly, is your confidence well founded?
If your answer to these questions is yes, your business may have appeal to a financial buyer. They don't want to buy a business where they are held hostage to one key employee. Where his leaving or being injured could seriously damage the performance of the business, and their return on capital.
If your answer to these questions is no, your business will not likely appeal to this buyer type without you first working on your business. There is something interesting about the type of work that will be required. If the shortcoming is documented proven systems and processes, when you rectify this shortcoming, you will likely increase revenue and profit. You will likely make your business more valuable. And it will be easier to operate as you work to sell it. As an unintended consequence of improving it, you may find that you can comfortably take much more time away, without worrying.
You may decide that preparing your business for sale to a financial buyer will be just too much work. From your point of view, there are other buyer types out there. So why worry about this one?
It is true, there are other types of buyers happy to be involved in operating your business. However, the greater the number of different buyer types you can legitimately attract to your business, the greater the demand that you will create for it. And since there is only one of your business, increased demand with no corresponding increase in supply is likely to increase the price you can expect to get. And a benefit to you from increased demand will be less stress.
So if your business won't qualify today, you have a choice to make. You can do what is necessary to make it qualify, and get a corresponding increase in enterprise value. Or you can accept it as it is, and remove financial buyers from your prospect list.
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