One of the significant services that Generational Equity, part of the Generational Group, provides to its clients is the ability to help the business owner look at his/her business through the lenses of potential buyers. For many this is a hard, painful concept to fathom because, as one client told me a few years ago, “No one likes to be told their baby is ugly and needs improvements.”
But just like your doctor, we tell you the tough news so you can then analyze your company as a buyer would and anticipate, create, and implement strategies to address their possible concerns. The great news is that thinking like a buyer and improving your business does not have to be rocket science and in many cases strategies do not have to be fully implemented in order to address buyers’ concerns. For lots of folks, just being on the path is what matters to a buyer because most realize that the final outcome, the goal, is an ongoing path that continues for perpetuity.
How do you begin to think like a buyer and objectively review your business? The first step is to realize one basic fact: Professional buyers of businesses (the kind of buyers you want to attract by the way) are wary of risk!
Now of course the acquisition of any privately held company will carry with it a certain element of risk and unknowns. By the very nature of the way our economy operates, the secrecy and confidentiality that encompass privately held entities is both a strength and a weakness. The positive is that prying eyes can’t see the inner workings of what makes your company unique; the negative is that you have to then convince a skeptical buyer that your business is indeed successful and explain why.
Having said that, as we have discussed before, buyers are most interested in one primary area: the stability of your company’s future earnings.
The more you can do to give a buyer confidence in this key area, the better off you will be when sitting down with him/her during negotiations and due diligence. This is a vital concept because far too often entrepreneurs focus on top line, revenue growth, at the expense of profit margins, and this is key area that buyers examine quite closely.
Important Profitability Tests
For example, one of the first questions we discuss with our clients is their profit margins by product line. We do this because we need to determine if the business is buying growth with key customers at the expense of margins. To many business owners, this analysis is eye-opening because often they learn that the key client they have been working with for years and generating revenue growth from has been maintained by sacrificing the bottom line.
This is just one example of the type of analysis a buyer will do on your earnings because, again, they need to ensure stability of income going forward.
Another example: How many of you compare your profit margins to industry norms? This is an analysis that most professional buyers will do since they have access to research tools that allow them to make this comparison. Again this is a key part of the standard business valuation that Generational Equity does on all of its clients becauseindustry ratio comparison can be indicative of quality of earnings.
These are just two of the tests professional buyers will use when looking at your future earnings strength. Time and space do not allow me to fully explore all the others. If you want to learn more, I suggest attending a Generational Equity M&A seminar. These are highly educational and are designed to help you start to review and analyze your company as a buyer would. If you are planning to exit sometime in the next five years, I recommend attending one soon. Carl Doerksen is the Director of Corporate Development at Generational Equity.
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