How to Attract a Buyer for Your Business

Just saying that you’ll sell your business when you want out is not a strategy – it’s wishful thinking. Your business must be something that others want to buy.

To become a business that others want to buy, you must plan ahead. Indeed, you should be planning for your exit from your business from the moment you open the doors to start it.

Would-be Buyers tend to seek the following in a business:

No dependency on the Owner. If the business depends on the personal relationships between you (the Owner) and the customers, there is substantial risk that the existing customers of the business will flee after you leave the business.

To avoid dependency, you should begin grooming one or more employees to operate the business. Another potential solution is that you could offer an earn-out arrangement to a potential Buyer, which would entail your continued service for a period of time after the sale. An earn-out is an additional price to be paid for the business based upon the achievement of certain goals. The size of the earn-out for you could be based on customer retention or achievement of a certain level of sales.

Ability to generate profit. If the Buyer is going to work in the business, the business must have sufficient cash flow to pay the Buyer a salary plus meet expenses plus provide money for reinvestment into the business. If the Buyer views your business solely as an investment, the business must have sufficient earnings to provide the Buyer with a reasonable return on his or her investment.

The selling price of your business will be based on the historical earnings performance of the business. You should be able to provide a potential Buyer with three years of financial history. The financial history should be complete, accurate, up-to-date and, preferably, audited. The Buyer will use this historical data as the basis for his or her projections of future earnings.

Diverse customer base.  The old saying — “Don’t put all your eggs in one basket” – rings true here. Because there is always a risk of losing a customer, your business will attract more buyers if it has many customers, none of whom constitute a disproportionate amount of revenues and all of whom are repeat customers. Demonstrable growth in the number of customers is also an important attribute.

Special attributes. What makes your business different or special? A proprietary product? Location? The customer list? Trademarks, patents and copyrights? Your company’s brand and reputation? Develop these attributes for the benefit of your business while you own it, and then market any special attributes to would-be Buyers when you are ready to sell.

Good financial controls. Are your customers timely in paying their bills? If some aren’t, consider writing off the relevant portion of your accounts receivable.  Similarly, if you have any old or obsolete inventory, write it off.

Good operating controls. You demonstrate good management when you can readily show organized and complete corporate records regarding employees, licenses, permits, leases, patents, trademarks and other contracts. The would-be Buyer’s view of your business is also enhanced if you can demonstrate that you have no customer, legal, environmental or other issues or liabilities, or that any such issues have been resolved.

Solid marketing plan. Are sales growing each year? Do you react in timely fashion to changes in industry or economic conditions? Do you continue to work to grow the business even after you’ve put it up for sale?

Attractive, clean facilities.  Do you need to renovate or spruce up to present the best image possible to a would-be Buyer?

Reasonable and fair asking price. There are a number of valuation methods, which are beyond the scope of this blog.

Demonstration of trustworthiness. If you hide something from the would-be Buyer and he or she finds out, the Buyer may flee out of fear that your lack of forthrightness signals that there are also other problems. Alternatively, if you are transparent about issues, you’ll make closing a deal more likely because you’ve demonstrated trustworthiness.

Your willingness to help finance the Buyer’s purchase. Do you want all of the purchase price money up front? Or, can you accept a down payment with a promissory note for the rest? You’ll attract more would-be Buyers if you can wait to receive your full purchase price.

Your willingness to train the Buyer to run your business.

Remember that Buyers are keen on reducing their risk. Anything that you can do to allay their fears will help you execute a sale transaction and get a good price. You and the should each seek legal counsel for guidance and the preparation of the necessary transaction documents.

 ©2013 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050,  Minnetonka, MN 55305   952-649-9771  www.bwittenburglaw.com  bonnie@bwittenburglaw.com