Thinking about selling your business? In this expert post, we share key elements potential buyers look for that will increase the value of your business.
What do potential buyers specifically look for in an acquisition and what are interesting starting points for them to enter into the conversation with a seller? Whether the potential buyer is a strategic party or an investor, they both want to be able to recoup their investment in the foreseeable future.
1. Strong management team
Buyers like to see that the incumbent management team is of good quality. This allows the shared (growth) goals to start up in the short term with people who know the business and the market well. No time is lost looking for the right team.
2. Low investment requirement
Production assets that are state-of-the-art and space within existing utilization and production capacity mean to a buyer that little capital is needed initially to achieve growth. Buyers find this interesting because it shortens the payback period of the investment.
3. Short cash conversion cycle
The cash conversion cycle indicates how much time it takes a business to convert goods produced and services provided into cash. The longer the cash conversion cycle, the more capital is locked up in your business. This hampers the rate of growth and makes financing less easy. After all, outside financiers like to see their loans repaid quickly.
4. Customer stickiness
Customer stickiness means that customers don't (can't) just leave you, so the revenue stream has a high degree of stability and certainty. We see this in SaaS (Software as a Service) businesses, for example, where a subscription model ensures a periodically recurring revenue stream.
But even with installers working with service contracts and telecom companies working with subscription bundles, for example, you see recurring revenue streams. Customer stickiness also applies in cases where the product (or service) in question is so intertwined with other processes at customers that switching to another provider costs a lot of time or money.
5. Scalability business model
The most common question investors ask when first meeting a potential acquisition candidate is, "How scalable is your business model? By this is actually meant, 'How quickly can I achieve increased revenue and profitability at low cost and low investment?' Is it a matter of 'plugging in' new customers or must you first invest in staff expansion? This takes time and besides, people are scarce.
6. High barriers to entry
Does the market in which you operate have high barriers to entry or can any random party just enter your market? Low barriers to entry mean that the sustainability of profit margins may come under pressure. High barriers, for example, necessary certification, specific knowledge or high investment in capital equipment, make your earning power more resistant. Investors obviously like that.
7. The people
In recent conversations with buyers (both investors and strategists), a regular agenda item has become people. 'What about employees' attachment to your company? Have you always taken good care of your people, paid them market rate, and do they feel connected to the company? Or, perhaps for the sake of profitability, have you invested little in your people and their development?'
Especially in times of scarcity like now, loyal and motivated employees are very valuable. So make sure you anticipate this well!
