Key Business Buyer Issues

I have looked at more than 1000 businesses for sale in my career and was recently asked what was the single biggest component of a business that adds significant value when it is for sale. I must admit I had to think a bit about the answer because there are a number of possible answers: it could be impeccable financials, long track record in business, a growing company (or even just a stable one), a business that is easy to transition to a new owner, or a few other fundamentals.

However, I settled on sustainability with an offshoot to it. First,

a seller must understand that a prospective buyer’s biggest concern is whether or not the business can continue at the same level and/or grow after a sale.

To that end, much remains uncertain since very little of any small business’ revenues/profits is guaranteed in the future.

The offshoot I mentioned above is specifically related to recurring revenue. A few years back I did an informal study of 100 businesses that were sold, all of which were generating $200,000 to $300,000 of annual Owner Benefits. Of those, 20 had a component of recurring revenue – contracts and service agreements which were not easily broken and would therefore provide a buyer with a reasonably high level of assurance of the company’s future performance. Those 20 companies sold for a valuation that was fifty percent higher than the average of the other 80.

Pretty incredible isn’t it?

As an owner, stop and think about what you can do in your business to generate recurring revenue. It is not always easy, but if you get creative you can come up with ways to do so.

Even in pure and simple service businesses like lawn or pool care, the mere act of getting clients to sign 12-month contracts can have a huge impact of the valuation and attractiveness for a buyer.

Even retail business could look at selling annual memberships that give members a discount. While the membership revenue will never be huge, having this revenue plus all of the relevant client data to build marketing campaigns can also add value premiums.

Getting back to businesses that lend themselves more to this model, think about companies that supply water, or coffee to offices or ones that provide some form or regular service. The “downside” to these businesses is that it is generally difficult to gain new clients but the flip side is what makes them so attractive and namely it is equally difficult to lose a client. That in a nutshell, is what will not only be incredibly attractive to a buyer and add value, it will allow you the owner to open up the business everyday and know that you have a certain amount of business already in the door.


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