What Buyers Want in a Business: Different Purchasers Have Different Priorities

The types of buyers, what they want, and how you can prepare for a sale—even if it’s a long way off

Selling your business can be a stressful and complicated experience. Finding the right buyer, getting the right price and sale structure, and putting someone else in the driver’s seat is a big deal. And this can get even more complex if you’re proud of what you’ve built and want to see it live on past your tenure, which many owners do.

Entrepreneurs should play the long game when they start a business and plan to eventually sell it. Even if this time horizon is many years off, having this mindset keeps them focused on building a strong and healthy foundation for the company, and ideally one that is attractive to a range of very different purchasers.

The basic types of business buyers

While some of these categories overlap—some may share multiple elements—it’s possible to break down buyers by their basic motivations and intent when purchasing a business:

The strategic buyer

A strategic buyer is just that, strategic. Often, they are already in the same industry and are looking at acquiring a business as a growth opportunity; they may want to expand their customer base, range of goods or services, or geographic footprint.

Strategic buyers are typically looking to fold your business into their current operation, so you should expect to see some changes to your systems and staff after a sale. This is important for any seller that wants to maintain the business as a whole and safeguard as many employees as possible. If a seller is looking to find someone to carry on their legacy, this may not be the right option.

The financial buyer

Some financial buyers are looking to buy for long-term investment purposes. Their role may vary from taking over as manager to being a silent partner. They want to invest in something that is a proven success and will continue to succeed after purchase. In general, these buyers are usually less likely to change many aspects of a well-functioning business.

That said, there is a subset of financial buyers that have shorter-term investment goals. These individuals and entities, many of which are in the hybrid private equity space, will buy a business, make changes and upgrades, and then flip it for a tidy profit. Often, this may involve significant streamlining, including letting employees go and/or narrowing the business’s focus.

It’s especially important to understand the intention of a financial buyer before committing, so your business doesn’t become something you don’t want it to be (if that’s a priority).

Individual buyers who plan to run the business

These buyers are sometimes individuals looking to take over and actually run small- to medium-sized companies. They may be new to the entrepreneur game or an old hand, or this particular business may be a lifelong dream of theirs that they are finally able to achieve. In some cases, they are current employees of the business.

These individuals are usually fully involved in every aspect of the business after the sale, investing a great amount of time and effort because it’s now their livelihood. This is usually the best way to protect a business’s legacy if that’s a seller’s priority.

Understanding the buyers’ intentions as well as your own will help you make the right decision. Many owners want to see their business live on in some way, but others may simply want to sell for a profit and move on. Finding a buyer that fits the bill—and positioning a business to meet the needs of a range of buyers—will give the seller options and make sure his or her priorities are met.

Key indicators buyers look at when buying a business

There are fundamental factors that various buyers are looking for in a business purchase. Being able to offer more of these items will make the sale more attractive to different purchasers.

1.  Proven revenue and value

Buyers are much more likely to come through if the business has a proven track record of success and there are numbers to back it up. While all buyers are interested in these metrics, financial buyers and individual buyers who plan to helm the business in particular place a strong emphasis on these elements. There are a few ways to measure this and a few ways buyers might ask for it:

• EBITDA: Earnings before interest, taxes, depreciation, and amortization are considered a particularly accurate representation of a company’s earnings because it factors out interest on the debt, taxes owed, and the depreciation of assets. It gives buyers a good idea of the actual cash flow of a business and how much money there is on hand to re-invest or payout.
• Projected earnings: Buyers are unlikely to purchase a business that has limited growth potential and low projected earnings. Discounted cash flow (DCF) is one formula used to estimate the future value of a business. It attempts to justify present-day decisions by predicting the future.
• Multiples: There are various multiples used to measure the value of a business. Generally speaking, “a valuation multiple is a number or factor, that when multiplied by a measure of earnings, the result equals the total capital value of a company.”
• One of the most common is the price to earnings ratio that measures the market price of a company compared to its earnings. A company with a high P/E is considered to be overvalued and a company with a low P/E is undervalued. EBITDA (mentioned above) is another common multiple used to compare the company to similar companies.
• Consistent recurring revenue: Recurring revenue is the money generated that continues into the future, and buyers want to see consistent recurring revenue as assurance that the business is stable. This is why businesses with a subscription pricing model rather than those that widely fluctuate based on demand for goods or services, for example, maybe considered safer bets.
• A detailed valuation: Buyers need a bottom-line number that can come in various forms. An asset-based valuation looks at the difference between a business’s assets and liabilities. It is the number that would result if all debts were paid in full and all assets sold. However, it should be the lowest price a seller is willing to accept, not the goal price.

  A market-based valuation assesses what comparable businesses have previously sold for to determine an approximate fair market value. Income based-valuation closely examines the books and sets a value based on an average of past recent income that projects future success (projected earnings). There are also various valuation formulas that combine many of the previously mentioned factors (e.g., multiples, EBITDA) to assign a value, as well as independent third parties who specialize in evaluating businesses. Whatever the mechanism—or a mix of them—buyers will want to see the tangible value.

• Again, all types of buyers tend to want strong numbers. But some strategic buyers in the same industry who are simply intent on removing a competitor, folding unique processes or assets into their current business, or obtaining distribution networks, for example, maybe less intently focused on these metrics.

2.  A business with a detailed growth strategy

Sellers need to prepare a detailed growth strategy that shows the history of the business, evidence for its growth, and potential opportunities. This will vary drastically depending on the size of the venture and the industry in which it operates but should include plans for market penetration, market development, and product development.

3.  Vital employees

Most buyers will generally be interested in keeping employees on board that is crucial to the success of the business. It makes for a smoother transition and a greater chance of performance. But certain buyers are less covetous of certain employees. For example, an industry competitor who purchases the business may be intently interested in acquiring a top sales performer, but the organization’s accounting and administrative employees would be redundant since the buying company already has these functions in-house. In contrast, an individual financial buyer who plans to keep and/or run the business for the long haul wants all or most valuable employees.

Regardless, it’s important that you take care of your key staff before you get to the point of selling to make sure they want to stick around for the long run. Incentives like employee stock ownership and bonuses will keep workers engaged and invested in the wellbeing of the company. Simple things like building a positive work environment, showing recognition, and improving employee wellness will also go a long way toward keeping the people who build value.

4.  Systems and processes

Similar to employees, buyers will be more attracted to a business that requires less work upfront. If your company has repeatable processes and reliable systems that don’t need an overhaul, your chances of selling increase. It’s easier for the buyer to take over and improves continuity from one owner to the next. Of course, these systems and processes are more important to long-term investors rather than buyers who plan to gut the business and keep certain aspects.

The bottom line: Set your business up for a successful sale—and the options for who might buy

Even if selling your business isn’t on your immediate radar, it’s a smart idea to put these benchmarks and processes in place as if you were selling tomorrow. They are simply good business practices, and implementing them may draw attention to some aspects of your company that could use improvement. And when the day comes when you do sell, your organization will be healthy enough to attract a range of potential offers.

To learn more, contact Karp HR Solutions for a free consultation.