Selling a Business: Checklist from a Buyer’s Perspective
If you’re a business owner looking to sell your company, it’s important to understand how potential buyers will evaluate your business—and as a result, recognize the levers to maximize its value.
While every organization, every deal and every industry are different, there are a few common things that buyers look for. To that end, we’ve outlined a checklist for selling a business to help you align your organization with a buyer’s priorities.
Selling a Business: Checklist for Aligning With a Buyer’s Perspective
When selling a business, it’s important to put yourself in the buyer’s shoes to look at the different aspects of your company.
This checklist for selling a business outlines the key aspects that buyers consider when valuing a business and what you should consider to align yourself with their perspectives for a successful transaction.
Identify Any Customer Concentrations
If a business relies heavily on a single customer or a small group of customers for a significant portion of its revenue, it may be seen as risky by potential buyers. This is because if that customer stops doing business with the company, it could have a major impact on revenue and profitability.
A buyer may look at your company’s revenue from your top 10 customers in comparison to your total revenue for all years under analysis. Ideally, this number would be less than 20%.
A thorough analysis will also consider your gross margin per customer to gauge if you have any risk in profitability concentrations.
The same principle and analysis can be applied to your company’s vendors.
Assess Your Market Position and Competition
One of the most important things to consider is that buyers will assess your company’s position within the market and evaluate your competition.
They’ll want to understand your market share, market size and the competitive landscape in which you operate. Your brand reputation and customer loyalty will also factor into this evaluation.
Evaluate and Elevate Your Management and Team
Buyers will want to know about you, your management team and employees, so consider it an important part of your checklist for selling a business.
They’ll look in depth into two main factors.
1) Your involvement as an owner – Are you a key to the success of the business? The less involved you are in the day-to-day operations, the more attractive your business will be to the market.
2) Your management team – A buyer will want to assess their experience and determine whether the right people are in the right positions. More specifically, buyers will evaluate how key personnel are incentivized to remain with the business after the sale.
Strong management and a talented team can help to mitigate risk and position a business well for a successful transaction.
Evaluate Your Intellectual Property
Buyers will look at any patents, trademarks, copyrights or trade secrets that your company owns. They’ll want to understand the extent to which these assets differentiate your business from competitors and provide a competitive advantage.
Buyers will avoid weak intellectual property, and if a business relies too heavily on intellectual property, this may be a deterrent in the market.
Understand Your Revenue and Profitability
Buyers will want to examine your company’s financial statements to understand its revenue and profitability trends over the past few years.
They’ll look at factors such as repeatability and seasonality of revenue and gross profit margins by revenue stream to gain a better understanding of its sustainability and growth potential. Operating profit margin and net profit margin are also extremely important as it factors into the buyer’s ability to pay back investors and add to their bottom line.
As part of a checklist for selling a business, it’s essential to focus on your company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is at the core of this kind of analysis and critical to securing the right deal. It’s important to hyperfocus on your company’s EBITDA and EBITDA margin to attract potential buyers.
The buyer market can be segmented by EBITDA size, and companies with over $2M in EBITDA have a larger market to sell to. In addition, EBITDA margin is a crucial factor. Ideally, optimal EBITDA margins should be between 10%-20% (although this can vary by industry).
In addition to EBITDA and EBITDA margin, it’s beneficial for a seller to demonstrate steady revenue and EBITDA growth year over year, backed by a growth story that highlights future opportunity.
Calculate Your Free Cash Flow
Buyers will want to understand your company’s free cash flow, which, simplified, is your EBITDA adjusted for fixed asset and working capital needs, interest and tax expenses, and other capitalized obligations.
Free cash flow is an important metric because it indicates the cash that a new owner could potentially take out of the business to fund other activities, such as investing in growth or paying down debt.
The first step to optimize free cash flow is to understand how it is calculated. This will allow you to identify and pull the key levers necessary to increase free cash flow as a percentage of revenue.
Calculate Your Net Working Capital
Net working capital is the difference between a company’s current assets and its current liabilities; it can be a proxy that indicates how much is needed to operate the business, so it’s an important part of a checklist for selling a business.
Buyers will evaluate this figure to indicate how efficiently a business is managing its short-term assets and liabilities. In some cases, buyers may adjust the net working capital figure to reflect the amount of working capital that will be required to run the business going forward.
As part of the buying process, both parties will agree on a formula to calculate net working capital. During the due diligence process, the calculation (with identified adjustments) will generate a working capital “peg”—what is expected to be left in the business by the buyer. If actual net working capital varies from this peg, a positive or negative true up may be expected.
The best starting point to understanding your net working capital is performing a cash conversion cycle analysis, which is a combination of days payable outstanding, days receivables outstanding and days inventory outstanding.
This study of your company’s cash conversion cycle will give you a view of your business, which can easily be translated into a net working capital improvement roadmap.
Identify and Understand Your Debt Obligations
Buyers will also examine debt-like items to understand how they will impact the future cash flows of the business—especially if the deal is on a cash free, debt free basis where the buyer does not retain any of the cash or debt that the company holds. Buyers may adjust the purchase price based on these obligations to ensure that they are appropriately accounted for.
Rule-of-thumb: if the cost of the liability:
- Is not included in the EBITDA calculation;
- Is not a normal operating liability; or
- Is not paid in the normal payment cycle;
then, treat it as a debt-like item.
Learn More about Selling a Business: Checklist Next Steps
It’s important to note that valuing a business is not an exact science, and different buyers may have different methodologies or criteria. However, by understanding the aspects on this checklist, you can begin to view your business more analytically.
As you prepare for selling a business, consider how you can optimize these factors to present your business in the best possible light to potential buyers. By doing so, you can increase the likelihood of receiving a fair valuation and ultimately selling your business for the price it deserves.
