Want to Sell Your Business? Here Are the Six Major Factors Every Investor Will Review Before Deciding to Buy

Selling a business is seen by many as the glorious finish line for entrepreneurs, representing the culmination of years of hard work and dedication into a nice payout. However, many small business owners find themselves unprepared when it comes to positioning their company for sale. After decades of work, they are tired and beat up. They want to just sell the business and actually walk away with a good chunk of change to spend the rest of their lives with. 

But sadly, many business owners have insufficient profitability, lack of recurring revenue or a great database of loyal customers, and an absence of core systems. This can dramatically hinder the selling process or leave them with much less money on the table than might be possible. 

To attract potential investors and maximize the value of your business, it’s essential to focus on these six major factors that investors will scrutinize before making a decision to buy. 

Revenue and Profitability

The cornerstone of any business valuation is its revenue and profitability. Investors will closely examine your company’s financial statements to assess its historical performance and growth prospects. They’ll scrutinize revenue trends (typically over the last three years), profit margins, and overall financial health to gauge the business’s earning potential. A consistent track record of revenue growth and healthy profit margins will make your business WAY more attractive to potential buyers.

Recurring Revenue Streams

Recurring revenue is highly desirable for investors as it provides predictability and stability to the business’s cash flow. Subscription-based models, long-term contracts, and repeat customers contribute to a steady stream of income, reducing the risk associated with fluctuating sales. And even if your business is mainly one-time customers (i.e. homebuilders), they will look at the depth in your customer base and how attractive you look locally as the “go-to” business for your service offering.

Operational Efficiency and Scalability

Investors will evaluate the efficiency of your business operations and its ability to scale. They’ll assess the effectiveness of your processes, the utilization of resources, and the scalability of your business model. Businesses that can efficiently scale their operations to meet growing demand are more attractive to investors, as they offer the potential for significant returns on investment. It’s as if you are setting up your business as a franchise, where you have all of the documented, routine structure to how everything is run. So when someone buys the business, you essentially give them the “owner’s manual” to your company.

Financial Controls and Systems

Having robust financial controls and systems in place is essential for instilling confidence in potential investors. What do we mean by financial control? Here are some examples:

  • The timing of when you make major business purchases
  • How and when you hire new staff into the company
  • How you manage employee credit cards and the review process
  • How distributions to owners work in your company
  • Your payscale for your staff and how they are financially incentivized
  • The best practices for managing cash flow in your company

Investors will want to ensure that your business has accurate and reliable financial reporting, sound internal controls, and effective risk management practices. Demonstrating transparency and accountability in financial matters will enhance your credibility and facilitate the due diligence process.

Customer Diversification and Concentration

Investors will assess the diversity and concentration of your customer base to evaluate the stability of your business. A diversified customer portfolio (with plenty of details about each customer) mitigates the risk of revenue loss from the departure of a single client or sector. Conversely, overreliance on a few key customers can raise concerns about revenue sustainability and business continuity. Strive to diversify your customer base to reduce dependency and enhance the attractiveness of your business to investors. 

Growth Potential and Market Position

Finally, investors will analyze the growth potential and market position of your business within its industry. They’ll consider factors such as market size, competitive landscape, and barriers to entry to assess the business’s long-term viability and growth prospects. Demonstrating a clear competitive advantage, innovative product offerings, or untapped market opportunities will bolster investor confidence and increase the value of your business.

Positioning your business for sale requires careful attention to key financial details that investors will scrutinize during the due diligence process. Investing time and resources into strengthening these financial aspects will not only facilitate a smoother selling process, but also ensure that you achieve the best possible outcome when it comes time to sell your business.

Leave a Comment

Your email address will not be published. Required fields are marked *