Business Development Solutions
The Merger & Acquisition Resource for Growing Companies
And Can Make it Very Difficult to Sell Without Creative Deal Making
Business Buyers want to buy a system for making money that they perceive as having a high likelihood of making more money for them under their ownership.
The business buyer's perception of risk and therefore their confidence in the likelihood of your business making money for them under their ownership is affected by Lack of Transferability and Excessive Concentration.
Lack of Transferability Risk
Will your business work for the Buyer after you are gone?
· Marketing. Marketing for new prospective customers or selling opportunities may occur because of your country club or service club membership or other relationships. This is great for you but lacks transferability to a buyer. Business values are increased when there are marketing programs that can be turned on or off by you or a new owner.
· Sales. Sales may be based on your close relationship with key customers or the fact you are just a great salesperson. A selling system should be in position that provides confidence to a new owner that as new selling opportunities develop under their ownership, the Business can convert them to closed sales. Have strong sales tools so that an average salesperson, service technician or representative, or even a web site can convert prospects to customers.
· Product or Service Production and Delivery. Is a crucial part of the production or delivery process dependent upon the physical efforts of you? If you are the craftsperson or "expert", some ways to beat this problem is to grow in the same product/service line and hire/develop additional "experts", or expand your product/service offerings which would not require an "expert" – and market those new offerings effectively.
· New Product Development and Enhancements. For many high tech companies, the owner's individual creativity and knowledge of the product is crucial to continuing success of the business. Documentation of the existing product so enhancements can be made by any competent person without your guidance and systematizing the innovations are two ways to solve this problem.
Excess Concentration Risk
There are four areas of concern to business buyers.
· Customers. The greater the customer concentration the greater the risk. For the current owner, having big customers wanting to spend more and more money with you is good and it is hard to turn away the orders. On the other hand, the more your business is staffed, organized, and capitalized to support one or two customers the riskier the situation is to the buyer (and current owner also). I have personally talked to one business owner who had 85% of the company's $15 million in revenue from one customer. The customer dropped them, and within two months all the employees were gone and he was having a fire sale of the furniture & equipment.
· You. The greater the Company's reliance on your skills, efforts, and connections, the riskier it is to a buyer.
· Key Employees. The greater the Company's reliance on key employees' skills, efforts, and connections, the riskier it is to a buyer. Several ways to solve this problem are to develop operating systems and procedures to prevent too much power concentrated with any one employee, provide strong incentives programs for key employees to stay with the business … both during your ownership and a new buyer's ownership, and to have the strongest non-compete agreement the law allows for key employees.
· Vendors. Don't permit your business to become "captive" to a sole supplier of component parts.
If potential buyers feel that your business has Lack of Transferability and Excessive Concentration risks, then they will either not buy it, reduce the price they are willing to pay, or make a portion of the price contingent upon the business's future performance. An example of creative deal making could be that part of the price is dependent upon the revenue and gross margin of a key customer for so many years after the buyer takes over.
If you are interested in setting up an Exit Plan, we welcome the chance to talk with you.
Business Development Solutions
Jay Whitney, President