Value Drivers in Business Sales (2)

Buyers are often attracted to certain businesses for reasons other than reported profits. They will even pay premium prices for businesses if they see other factors that matter to them. Just what are these other factors? That’s what this series of articles is about. Prospective sellers take note!

These “other factors” might be called the “value drivers” (*1) in business sales. For any specific business and for any one buyer prospect, these “value drivers” will be unique. Generally, they can be grouped under seven separate general headings.

What Business Buyers Want

1. Attractive / Interesting Work

2. Strong Market Position

3. Right Location

4. Working Systems

5. Proven Stability

6. Good Books/ Records

7. Reasonable Price & Reasonable Terms

Right Location

Buyer prospects in Maine love to be near the water! They want to live near their work, either on the coast, a lake or a river. After that, they want to be in a property that can be purchased or leased on reasonable terms, and which has room for the expansion that they are planning. They also pay a premium for business premises that are well-designed, clean and neat. If they’re buying the real estate, they want to know that it is in the path of growth, so it will prove to be a good real estate investment.

Location, however, is also “virtual.” Today, the website location is important. Buyers seek and will pay a premium for firms with well-conceived Internet websites. Our sale of MaineLobsterDirect.com is well-known. The owner was paid a significant premium for inventing a business with a great physical and virtual location. It was on the desirable Portland waterfront AND it had a great website.

Working Systems

All businesses have management systems, marketing systems, sales systems and operations systems. Effective and efficient systems empower employees to be productive and happy. Acquiring a business that has good systems in place is always worth a premium.

Businesses with working systems also maintain their equipment, their vehicle fleet and their computer systems, keeping everything up to date. They keep their inventory for resale current.

They have good procedures and their documentation in terms of manuals is usually outstanding.

Systems also keep businesses out of trouble. A business that knows what it is doing is more likely to be in good standing with its vendors and its bank, and is not likely to have pending or expected litigation to worry the buyer.

One of the most successful smaller businesses we ever sold was Shad’s Advertising, a promotional specialties company here in Maine. It’s still successful today, 13 years after we sold it. Why did its current owner pay our seller client a premium price at the time? One very big reason was that it was set up to make money for him from the very first day. The systems worked. They still do.

Proven Stability

Buyer prospects like stability. Unlike the “entrepreneurial” types who start businesses from scratch for the thrill of the start-up process, business buyers are more managerial than entrepreneurial.

They like “turn-key” businesses that already have absorbed all of the initial start-up pains.

If buyers wanted start-ups, they would start them. They don’t. That’s why they buy instead. They want the stability of the business that is already established. They want to know that the seller will stand with them for the transition period.

Seeing the historic trends and structures gives buyer prospects comfort to move forward. They want to avoid making a big mistake.

Original article by Glen Cooper, CBI, CBA, BVAL

Authorized for republication

(*1) The term “Value Drivers” as used in this article is similar to, but not the same as, the term used in business economic analysis defined as “the economic variables that are critical to revenue and cost functions of the business.” In the real world of small business, though, many of the factors listed in this article also end up fitting nearly the same definition.