Inside the Mind of a Buyer
Written by the Qualinav Team
Business owners know their company better than anyone, but when it comes to selling a business, it is critical to appreciate how buyers think. Without considering the perspectives on both sides of a transaction, differing expectations can derail a successful sale.
Buyers of businesses fall into three categories: (1) competitors/strategic acquirors; (2) financial buyers (usually called private equity); and (3) individuals. This article will focus on the fastest growing category: financial buyers. These buyers tend to assess the attractiveness of a business based on several dimensions: (1) business model; (2) industry risk; (3) company-specific risks; and (4) growth potential. We unpack each below.
Why This Matters: When business owners don’t appreciate a buyer’s perspective, misaligned unspoken expectations can cause friction and ultimately get in the way of a deal. Understanding what buyers look for and preparing your business before taking it to market can significantly increase not only the valuation but the probability of completing a successful sale.
Background: We find that many business owners are unprepared for the feedback they receive from the market and oftentimes their expectation of value is very different than what potential buyers offer.
Be Aware: Educate yourself about how buyers think and anticipate their reaction to your business. Use this knowledge to position your business to achieve the highest value. Sometimes this can result in tracking data differently, or making a small addition to your business. For example, do you have a succession plan? On other occasions, it could call for collecting or framing data that buyers will want to see. Doing this before listing your business for sale will smooth the process and increase the probably of success.
#1 Know your business model: Just as each human being is different, businesses, no matter the size, are unique. Just as each of us has our own unique personality, there are personality types that categorize people based on a handful of factors. While they are imperfect and incomplete in reflecting our individual nuances, most of us tend to fall, to some degree, into one of these frameworks. The same can be said of businesses. Instead of personality types, however, businesses frameworks tend to be centered around business models. They are not inherently good or bad (speaking from a pure economic perspective); they are just different. And these differences can be seen in growth rates, stability of cash flow, and ultimately, valuation. Private equity investors think of business models constantly. So what's your business model? How do you describe it? Business owners know their business and inherently know their model. But being able to describe it clearly is an important foundation to begin the process of selling your business. Depending on what investment banker/business broker you hire, they may be able to help frame this important picture for interested buyers. However, too often the framing is left to potential buyers, most of whom know very little about your business. This is a mistake. Ensure that you can articulate your business model and the components that makes it special.
Coming in the next article: #2 Know how you fit into your industry…