What do you look for when searching for a home? Price is a great filter, but it isn’t the only factor to play a role in your decision. Is it structurally sound? In a good neighborhood? Would you be proud to call this house home?
When potential buyers are searching for a business, they, too, are looking beyond the initial price to see if the business is structurally sound and in a good and attractive market.
Budding entrepreneurs are often told that one way to reduce risk is to buy an existing business, but that’s not inherently true. It can be though, and whether or not it reduces risk depends on the sustainability and profitability of the business.
Four features buyers look for – or should look for:
- Successful track record. Is there a track record of steady growth? Is there forward momentum? A successful track record indicates that a business has been able to withstand the ebbs and flows of the economy.
- Good Future Prospects. Does past growth indicate future growth? What is in place now that will help in the future? Are there strong working information and operating systems? While these may be modified or even replaced after purchase, it increases the value to buyers.
- Valuable Employees. Employees are a business’s biggest asset, or, of course, its biggest liability. Is there an established, knowledgeable, trained team in place? How do they interact with other stakeholders and/or customers? Existing management teams provide much-needed continuity. At the same time, it is important that the current owner not be irreplaceable. The value or attractiveness of a business is diminished when the owner is perceived as the sole or key decision-maker.
- Established Clients and Contracts. Long-term customers are more likely to stay with the business even after it has changed hands. Are there written agreements in place? Contracts that will be honored? Is there a diverse customer base or does the company depends on only a few major clients? A larger customer base decreases risk and increases desirability.
Businesses lacking these qualities are like a straw house without a desirable location roof or foundation. They will likely not withstand a good stiff wind, much less a storm. Sustainability and profitability are key to any business sale; can your company demonstrate its worth in these areas?