Major Factors Buyers Consider

Before diving into the features specific buyer groups look for, I’ll list and describe the primary factors all buyers will consider when looking to acquire any company. After we cover these, I’ll review the two major types of buyers and the degree to which each buyer group seeks each of these attributes.

Factor 1: Profitability

The most important factor all buyers look for in a business is profitability. If your margins are lower than industry benchmarks, don’t waste your time or money focusing on other value drivers. Instead, invest in improving profitability. Only when your profitability is healthy should you focus on improving other value drivers, such as building a management team or infrastructure. 

Many buyers will consider a profitable business that lacks other key attributes, even in the middle market. But few buyers will consider a business that doesn’t generate a significant profit, even if it possesses many other valuable attributes. As a rule, always prioritize profitability over every other value driver.

In most industries, few buyers will give your business a second look if it isn’t generating a significant amount of profit. The primary exceptions are businesses in highly scalable industries, such as technology and healthcare. If your business isn’t generating substantial profit, don’t waste your money building infrastructure or a management team that won’t increase your profitability. Invest your money in sales and marketing instead. Only when your business is highly profitable should you invest in other optimizations.

The most important factor buyers look for in a business is profitability.

Factor 2: Management Team

Most buyers desire a company with a strong management team as opposed to a business that’s dependent on a few key people. Unfortunately, building a professional management team requires a new set of skills for most entrepreneurs. When you first started your business, you likely performed most of the key tasks yourself. But once you reached a certain point in your business, you probably built a management team that handled many of the key decisions in your business.

Starting a business requires a different set of skills than growing a business. And different sets of skills are required at different stages of growth. The skills required to grow your business from zero to $1 million in revenue aren’t the same skills needed to grow your business to $50 million or $500 million in revenue. 

Building a team requires both recruiting and management skills. You have to learn how to find and hire good people and then how to get the best results from those people. What position or positions would add the most value to your company? What does your company need most? Would a CFO, COO, VP of Marketing, VP of Sales, or VP of Human Resources help? Should you hire an external president? Take the time to develop a formal management team. Not only will your business be easier to sell, it will also sell faster, and as a result, your revenues and profits will likely increase.

Understand the different types of buyers and the degree to which they require infrastructure before you invest in building systems and a management team.

Factor 3: Infrastructure

Buyers in the middle market look for a business that has infrastructure and that’s scalable, or that has the potential to grow quickly. Buyers love a business that has significant infrastructure in which the owner hasn’t tapped its full potential. This usually involves an owner who’s burned out or hasn’t built effective sales and marketing systems but has the infrastructure and operational systems in place to quickly scale once sales and marketing are ramped up. To sell your business for the maximum amount, focus on building a business that’s as scalable as possible. You can greatly improve scalability and manageability by developing systems to streamline, automate, and document your processes, which will increase your business’s value.

Factor 4: Ability to Replicate

Buyers in the middle market also look for businesses that possess attributes that are difficult to replicate. If your business has low barriers to entry and is a “me too” product or service, this may turn many buyers off, especially if they feel they can easily replicate what your business has to offer them. 

But there’s one major exception to this rule. In industries that are viewed as a zero-sum game in which further organic growth is difficult to achieve, companies regularly acquire competitors as an alternative to organic growth. But again, this is still difficult to replicate. For example, companies in the pest control and commercial cleaning industries regularly acquire competitors, even if no competitive advantage exists.

The following is a list of differentiating factors that can make your business difficult to replicate and therefore increase its value:

  • Advantageous contracts with suppliers, vendors, or other third parties
  • A website with high search engine rankings
  • Cost advantages that are difficult to replicate
  • Custom software
  • Customer loyalty
  • Experienced management team
  • First movers in industries with network effects
  • Government regulations that restrict competition due to high barriers to entry
  • High switching costs for customers
  • Intellectual property, such as patents or trade secrets
  • Licensing requirements that prevent competitors from entering the market
  • Long-term contracts with customers
  • Prime location with a long-term lease, for retail operations
  • Proprietary technology
  • Recurring revenue
  • Repeat customer base
  • Significant barriers to entry
  • Stable customer base
  • Strong distributor or supplier agreements

One of the main aspects buyers look for is a strong competitive advantage. A competitive advantage should be summarized in an objective statement and should be difficult for competitors to copy. Your business must have a competitive differentiation that a buyer can’t easily reproduce if you want top dollar for your business. Superior customer service isn’t a competitive advantage. Rather, a competitive advantage is one that’s difficult to replicate, such as proprietary technology, economies of scale, patents, well-known trademarks, and brand name recognition, to name a few. 

When planning to sell your company, consider the extent to which buyers may view your business as easy to replicate. To make your company as attractive as possible, build a business that’s difficult to replicate.

Factor 5: A Growth Plan

Regardless of who’s most likely to buy your business, if you want to maximize its value, you should create a plan that outlines its potential growth opportunities. Most buyers will ask why you’re selling when you’re at a supposed inflection point in your business. Your answer will either maximize or destroy your positioning. There should be plenty of runway left for the buyer. Ideally, you should be in the process of executing your growth plan so you can backup the assumptions in your plan with current data.

Prepare a short business plan with simplified financial projections. Highlight the major ways you can grow your business and include a short, bulleted list for each growth opportunity. Here are some tips for preparing projections:

  • Don’t lump all revenue streams together. Break your revenue down by type.
  • Include three sets of assumptions – low, medium, and high. Av0id hockey stick business plans – scenarios that show steep increases following periods of flat performances – they diminish your credibility. Prepare your projections in a spreadsheet so the buyer can play with the numbers to determine the impact of any potential changes in the variables, which is called a sensitivity analysis. 
  • Document and provide backup documentation for each key assumption. What’s the basis for forecasting each source of revenue? What’s the basis for forecasting costs? Are they based on a percentage of revenue, are they fixed costs subject to inflation, or is there another variable? What are the assumptions behind capital expenditures over the coming years?
Build a business that’s unique or difficult to replicate.