By JoAnn Lombardi, President VR Business Brokers/Mergers & Acquisitions

When considering selling your business, every buyer expects a business of great value as an investment. Depending upon the qualified candidate, it could be an entrepreneur with a specific set of needs that motivates them to invest in an established business or it could be a private equity group that sees the benefit in acquiring a business based on their strategy for future growth. Whatever the reasoning might be, the challenge is what can you do to attract the right buyer?

Here are 12 steps to take in order to reel in the best buyer during the selling process:

1. Provable Books and Records – In the purchase of a business, every buyer expects to verify the information given to them by the seller and the seller’s broker. This is done during the due diligence period, after a written contract has been agreed to by both the buyer and seller. Typically this is done by a qualified financial advisor or CPA.

2. Reasonable Price and Terms – When a business is to be purchased, a reasonable price at fair market value is determined by other businesses in a similar industry to the one available for sale. The terms, commonly referred to as seller or third-party financing determines the desirability of the business listing. The return on investment (ROI) establishes if the price and terms are reasonable, based on the amount of time it takes to recoup the investment.

3. Financial Leverage – The financial leverage it is gained by utilizing the down payment and suitable loan to maximize the investment level of buyers capital. The leverages gained by a formula of borrowing from the seller or third-party lender to maximize the investment potential. Thus a business offer financing is more desirable than a business with the same asking price and does not have terms.

4. Discretionary Earnings (DE) – Discretionary Earnings is also referred to as “Owners Benefit” and also “Adjusted Net”, which is a term to reflect the salary and net profit of the business. It also contains other items that are at the discretion of the owner to purchase for or not for business purposes. It is also common practice to add back any interest paid and depreciation on the equipment during the period of time being analyzed.

5. Furniture, Fixtures and Equipment (FF&E) – FF&E is the value of these items that are included in the purchase on either a Stock Transfer or Asset Purchase agreement. Typically they are valued at today’s marketplace conditions and not when they were originally purchased.

6. Transferable Lease – In the sale of a business the property leased must have an assignable lease at the current operating cost of the tenant. If this lease is not assignable, then a new lease must be negotiated and typically is at a higher rate than the current lease.

7. Training After The Acquisition – In most cases, after the sale occurs, the owner and seller of the business will help to acquaint the buyer with a reasonable time, typically two weeks. During this time period, the seller will train the buyer with all facets of the business, be introduced to employees and vendors as well as customers. This helps to make the transition a smoother period so as to not impact the business in a negative way.

8. Good Appearance – The overall appearance of the exterior as well as the interior of any business is a strong selling feature. The curb appeal has a lot to do with the value of the purchase of a business.

9. Covenant Not To Compete – It is always desire of a buyer to not have the seller compete for a restricted number of miles surrounding the business and for a stated time period. In this agreement, it helps to ensure the seller will not compete with the buyer and take the customers away from the future.

10. Sales – This is very important in a Retail or Restaurant business where the loyalty has been established by the existing business.

11. Understandable Reason For The Sale – Knowing why the business is being offered for sale helps to justify the reason for the seller to exit his or her business. Retirement, health, other factors such as relocation, partner and family disputes can also impact on the reason for sale.

12. Dealing In A Timely Manner – Every business is a changing picture from week to week and timing is crucial in the purchase of a business. By not being timely, severe changes may occur affecting the value, and profitability of the business. Seasonal changes can also increase or decrease the value based on sales volume fluctuations.

How can you improve the value of your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

The Swiss are known to value their independence. They don’t use the Euro currency despite being sandwiched between France and Germany, and they never officially picked sides in the World Wars for fear of tying their wagon too closely to one geopolitical regime over the other.

That’s why we give the name the Switzerland Structure to a business model that is set up to be free of a reliance on a key customer, employee, or supplier.

You probably already know that a customer or employee dependency can undermine the value of your business, but have you ever stopped to think how one of your suppliers could also lead to a valuation drop?

Acquirers want to invest in businesses that inoculate themselves against danger and being dependent on a supplier can be a risk.

The $4 Million Haircut

In 1994 Robert Hartline started selling phones in the back of his car. By 2019 he had built Absolute Wireless into a chain of 56 wireless stores and 350 employees. He had two main carriers that supplied him with the bulk of his data plans.

Hartline was able to systematize his business while he grew by creating employee onboarding videos and delegating key processes for his new employees to follow.

The business was a success, and Hartline was riding high up until early 2020. The pandemic hit, and two of his wireless carriers merged, leaving Hartline’s business spinning out of control.

One carrier assumed the dominant position in the marketplace and promptly delisted its legacy dealers from their Google search listings. Panicked by the abrupt change of posture from his wireless carrier, Hartline decided to sell to another dealer, who was on better terms with the now dominant carrier.

Hartline agreed to an acquisition offer, but as diligence progressed, the carrier insisted Hartline drop 10 of his stores. Hartline’s acquirer promptly dropped the acquisition offer by $4 million. Frustrated but still happy to get out, Hartline agreed to the lower number only to be told the acquirer was not prepared to pay cash and that he would be asked to finance almost half of their acquisition over time.

Hartline has gone on to create successful businesses since his experience with Absolute Wireless and now prefers software businesses, which are not beholden to a major supplier.

If you find yourself too dependent on a supplier, make sure you invest in your customer relationships so that your customer thinks of themselves when buying from you, not your supplier. Next, consider cultivating a relationship with alternative suppliers even if it costs you a point or two of margin in the short term. Over time, the diversity of suppliers will allow you to avoid the valuation discount you incur when you become too dependent on a single supplier.

How can you improve the value of your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

If your goal is to build a more valuable company, stop selling your time.

Billing by the hour or day means customers are renting your time rather than buying a result, which means that your business model lacks leverage. To grow, you need to either work harder or hire more people. Since it can take months to ramp up new employees, fast growth is just about impossible.

One of the eight factors that acquirers look for in the businesses they invest in is your company’s Growth Potential. Simply put, they want to know how fast they could grow your business, and nothing diminishes your Growth Potential more than selling your time.

Billing by the hour can also drag down your customer’s satisfaction with your business — because customers dislike the feeling of being nickel and dimed. They know you’re incentivized to lengthen the time a project takes, while they want a solution in the shortest time. This misalignment leads to unhappy customers, which can destroy the value of your business.

Peddling time also invites competition. When you sell your time, you allow customers to compare you with others offering the same service. This can lead to downward pricing pressure and lower margins as you become commoditized.

How Likeable Media Stopped Selling Time

Carrie and Dave Kerpen started Likeable Media, a social media agency, in 2006. Facebook was emerging as a dominant platform, and marketers were trying to figure out how to monetize users of their platform.

The Kerpens started selling their time but quickly realized the limitations of an hourly billing model. They realized that customers didn’t want to buy their time. Instead, Likeable customers wanted to buy social content. Marketers wanted a video they could post to their Facebook feed, or a blog post they could publish on their site.

The Kerpens decided to switch from an hourly billing model to the Content Credit System. They assigned each piece of content several credits. For example, a tweet might be one credit, a written blog post might be ten, and a video might cost twenty credits. Customers signed up for an annual allotment of credits they could roll over month to month.

The Content Credit System transformed Likeable Media for the better. To begin with, customers were no longer buying time. Instead, they were happy to pay for tangible output rather than trying to scrutinize an hourly bill. The credits also made it easier for Likeable’s Account Managers to upsell customers. They no longer needed to justify why a particular project would take more time. Instead, they suggested that customers buy more credits if they needed more content.

The Kerpens’ innovative billing approach also created recurring revenue because The Content Credit System relied on annual contracts renewed each year.

The Content Credit System also transformed Likeable’s cash flow because customers paid for their credits upfront.

Most importantly, the Content Credit System enabled the Kerpens to stop selling their time and build a team. By 2020, Likeable was up to more than 50 full-time employees when they caught the attention of 10Pearls, a digital strategy company which acquired Likeable Media for 8.5 times EBITDA, a healthy premium over a typical marketing agency.

The bottom line? If your goal is to grow a more valuable company, stop selling your time and start selling your customers’ results.

How can you improve the value of your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now: