Key Factors for Buyers

It's important to recognize that the things you love about your business are not necessarily the same things that a buyer will love. You may appreciate a lot of the intangible benefits you get from being your own boss, from your status in the community, from knowing that you provide a good product to your customers and a good working environment to your employees. Possibly you value some of your perks even higher than the salary you take out of the business.

Cash is king. However, buyers tend to look at a business in a much more cut-and-dried way. The essential thing that most buyers will be interested in is earnings and cash flow. They'll want to know that your business will provide a stream of dollars that's predictable, steady, and high. Some buyers prefer to look specifically at cash-flow statements, while others will focus on your income statement to examine earnings before interest and taxes (EBIT). Still others will place the most weight on earnings before interest, taxes, and depreciation (EBITD). The point is, your income stream is key. You need to prove the size and regularity of your positive cash flow, preferably with audited financials going back at least three years.

A very important aspect of your cash flow and earnings is their ability to be replicated in future years, without your presence. If your professional expertise or salesmanship is the main reason the business makes money, you will have a hard time convincing the buyer that the cash stream will continue in future years.

Buyers are most concerned about the future earnings of your business, and less concerned about the past. However, the future is difficult to predict with any degree of certainty, so most valuations are largely based on your historical financial statements. You will, however, be expected to provide projected financial statements that show how the business might be expected to perform after the sale. You may also want to emphasize your future plans: new products in development, promising new distribution methods, and other items that should contribute to income growth in the future.

Warning Don't make your predictions about the future too rosy — they may come back to haunt you in the form of a lawsuit for fraudulent conveyance if they don't pan out. For example, some advisors say that you should predict only that your business will match current growth in your industry.

Secondary factors. A secondary consideration for most buyers will be the verifiable assets of the business: the real estate, equipment, patents or trademarks, and even such things as inventory, customer lists, and contractual relationships you've established. These items are the buyer's "insurance" — things that can be sold or used elsewhere if the earnings stream dries up. Here's where owning your business location and equipment, rather than leasing them, can be important.

Buyers will examine your key financial ratios to see how your business compares to the industry average, to other acquisitions they may be considering, and to the criteria for purchases they have set up for themselves. A key consideration is that your business have a clean balance sheet with low debt. The buyer may have to increase the debt burden in order to make the acquisition, and won't want total debt to be too heavy for the business to support. Furthermore, a low debt load is more evidence that your business has a strong flow of earnings.

Some buyers will be interested in knowing that you have an experienced manager or team of employees in place to take over when you leave. They'll want to know that you have groomed your successors, and that the successors will stick around. Other buyers will be looking for a business to actively manage, and will want to avoid long employment contracts with existing managers.

Work Smart In preparing to sell your business, your best bet may be to choose your most likely successors and prepare them to take over management of the company, but hold off on establishing or renewing any contracts with them until the buyer's identity and plans are known.

Buyers will also prefer that you have a lot of documentation available for your business. They'll be taking a close look at what the papers actually say during the due diligence process, as negotiations proceed. But the very existence of documentation like sales reports, production reports, employee organization charts, job descriptions, operations manuals — all that paperwork you've tried to minimize or avoid up to now — serves to tell your buyer a lot about your business, and also increases his or her comfort level with the professionalism of your management style.