If you’re considering selling your business, you have to look at its “curb appeal.” Whether or not your business is brick and mortar, it’s making an immediate impression on prospective buyers.
You know the value of your business. They key is to get your potential buyers to see that value and get excited about the possibilities.
The thing to remember is that, in many cases, you’re selling what your business could be and not just what it is. This requires a specific strategy and knowledge of what your potential buyer will be looking for.
In this post, we’ll delve into the psychology of potential buyers and the seven different factors that influence their perception of whether your business represents a sound investment.
Knowing these seven factors is the difference between a profitable sale, and your business lingering on the market, losing value and appeal each day it sits there.
The Psychology of Potential Buyers
All buyers share two common desires: Maximize return and minimize risk. To achieve these goals, buyers look at a number of internal and external factors related to your business.
The Buyer's Equation: Maximize Profit and Minimize Risk
The problem? These seven factors buyers are focused on may not be the areas you’ve been focused on as you prepare to sell your business.
Let’s look at them one by one so you can make a strategic plan for addressing all the possible concerns—and also maximizing all the potential benefits.
1. Market Trends Affect Your Company’s Value
Even though market trends are completely out of your control, they play a significant role in how valuable your business is to a potential buyer.
If your company is operating in a large, high growth market, it looks more appealing to a potential buyer because it stands a better chance of producing larger amounts of future income.
Get really clear on how market trends affect your business by asking these questions:
- How big is your market and how fast is it growing?
- What demographic trends work for or against you?
- Are there new technologies moving the market? Does your company provide a technological advantage?
- Is the company in a defensible niche?
- Are current economic trends working for or against you?
2. Your Customer Base Matters to Buyers
Customer relationships are important; long term, loyal customers add value. But not if the customer rolodex exists only in your head. Before putting your business on the market, make sure you’ve invested in a Customer-Relationship Management product or service that makes it easy for the new owner to connect with loyal customers or reach out to those who have fallen by the wayside. (Not sure how to get started with CRM? Sign up for the SCORE newsletter and be the first to know when our next CRM workshop will be offered.)
3. Environmental, Legal, and Regulatory Red Flags Can Kill a Sale
No buyer wants to bid on a lemon. Fixing environmental, legal, or regulatory infractions, no matter how minor, is a headache for your potential buyer. Sometimes the cost of those corrections significantly impacts the profitability of the sale, but even if it doesn’t, remember that you are up against the buyer’s perception. Any red flags may be enough for the other party to simply walk rather than deal with the paperwork and red tape.
Make sure that you can demonstrate that your business is up to snuff when it comes to environmental, legal, or regulatory standards. If you have any doubts, schedule an inspection so you can have a report showing a clean bill of health.
4. The Type of Sale Impacts the Buyer’s Bid
If your buyer is financing the sale, the interest he’ll be paying will affect what he’s willing to pay. Lower interest rates mean a higher price for the seller.
Decide how low you’re willing to go on your price before you head into the bargaining stage.
Consider financing the purchase, but make sure you investigate your buyer thoroughly. Look for equity just in case.
5. Buyers Look for a Solid Profit and Growth History
Be prepared to show 3 to 5 years of positive sales and earnings trends documented by an income statement, balance sheet, and cash flow that are well organized and easy to understand.
If the buyer needs a loan from a bank, he will need your financial data to show the bank.
If you are attempting to show a long-term growth strategy, your buyer will want to know where the growth and increased value are coming from. You’ll want to identify specific customers and projects that produce the growth, as well as resources and investment required to execute the plan.
Also useful are operating budgets with financial statements that show how well you performed to those budgets. These show how well you understand your business and how much a buyer can trust what you’re telling him.
As you prepare the data to present to a potential buyer, keep in mind the following:
- You must ensure that the financials show clear visibility between personal vs. business expenses. Mixing personal and business expenses can be a big issue in negotiations.
- You should have a solid explanation for declining performance or high volatility.
- You should know that competing on price alone is a tough long-term strategy and a hard sell to a buyer.
- Buyers are impressed by technical, proprietary, or patented products.
- Unique process knowledge or capability is another big positive
6. Small Details Still Matter When Selling a Big Business
If you have a brick and mortar business, don’t overlook the impression your physical space will make on potential buyers.
Here are a few simple rules of thumb that will sound familiar if you’ve ever put a house on the market:
- Neatness counts as well as cleanliness and orderliness of plant, property and equipment.
- A little paint goes a long way.
- Size matters. Larger companies pose less risk to a buyer. What can you do to make your company look like a big, well-oiled machine rather than a scrawny, second-rate operation?
7. Buyers May Want to Retain Your Top Talent
In many cases a prospective buyer is investing in the management team as much as any other factor in a business. If all the knowledge of a business is inside the head of the owner and the owner leaves the business after a sale, the new owner is left with a huge headache and lots of risk.
Give your potential buyer the confidence to close the deal by making sure you have the following on hand:
- Well documented processes and procedures so a new owner can easily learn the ins and outs of a business from existing documentation.
- A strong management team left in place with key employees identified and willing to stay on.
- A transition contract that compensates you for staying a period of time with the business and assisting with a smooth transition of management.
Look at Your Business with an Objective Eye
Get out of your perspective as a business owner and ask yourself why someone would want to buy your company.
Tell your story in the best possible light. Support your assertions with numbers and data. If you can’t support your story with data, all you have is an opinion.
Has Your Business Been Lingering on the Market Without Serious Bites?
Perhaps you’re not succeeding in selling your business. Or maybe you’re not quite ready to sell the entire business, but you’re looking for an influx of capital.
Consider simply selling an interest in your business rather than the whole thing. It appeals to some buyers because it keeps the owner (and presumed brains of the outfit) actively engaged in the business and with a personal stake in its success.
- You’ll lose absolute control since the buyer will want a controlling interest.
- Some long-time owners have a hard time taking direction from a new controlling partner.
- Diversify wealth – you gain wealth and the company gains liquidity.
- The owner stays involved in the business.
- An infusion of cash and new ideas can revitalize a business that has plateaued.
Whichever way you choose to go, create a professional looking sales document that highlights company strengths and anticipates what buyers want to know. You, as a prepared seller, know your business’s strengths and weaknesses. A good sales document and a knowledgeable pitch will mean your business has tons of curb appeal for prospective buyers.
Let SCORE help you craft that document. We can bring an outside view and assist you in showing your business in the best light.