Who in their right mind would buy your business?

by: November 20, 2013
It’s pretty common for entrepreneurs to have an optimistic view about the value of their own business. At a later date we’ll look at some of the secrets of maximising the capital value of your business, but right now there’s a more fundamental question: would anyone really want to buy your business?
The majority of businesses that are put on the market fail to sell.  That’s a scary thought.  The process of putting your business on the market can be time and energy consuming, business disruptive, and it costs money.  The even scarier thought is that many of the reasons for failure can be avoided with adequate preparation.  Here’s a few of the most common reasons:
No-one interested in buying.  Ask yourself why someone would buy your business.  Be honest – is there something valuable about your business that’s worth paying good money for?  Most commonly, businesses are bought for their customer base, product or specialist skills & knowledge, scale, or as an effective way of entering a new market or geography. It’s got to be a cost effective reason: the alternative for a potential buyer might be to build themselves whatever it is that you are selling.
Mismatch between the price you want and the amount anyone is willing to pay. Fairly obviously, if you want more than anyone is prepared to pay for your business, you won’t sell it.  Bearing in mind the downside of a failed sale process, I’d strongly recommend you obtain a completely honest expert view as to the likely price, and decide whether or not you’d be prepared to sell at that price.  If not, don’t put your business on the market.
Reliance on key individuals. If your business is reliant on (or perceived as reliant on) a few key people then that makes the business much less attractive to buy.  Particularly if those key people are going to do so well financially from the sale that they might be less motivated subsequently.
High dependency.  A few customers accounting for a significant proportion of your revenues may be cause for concern amongst potential buyers as the loss of one of these customers could have a major impact on the business.  Similarly, reliance on a sole supplier exposes the business to greater risk, as does business critical relationships with any other third parties.
Poor customer service/poor product quality. It’s not an attractive proposition to buy a business with a poor reputation, unless the price takes this into account. Better to sort this out before taking a business to market.
Intellectual Property (IP) issues.  If your IP is integral to the value of your business, then it should be and have been properly protected legally through watertight licence agreements, employment contracts, subcontractor agreements, etc.  Similarly, there must be proper evidence that all IP used both internally and within products/services supplied to customers has been legitimately used and supplied without breaching, and compliant with, anyone else’s IP rights. A potential deal breaker if this hasn’t been done.
Tax, legal and accounting issues.  Due diligence will, amongst others, forensically examine everything to do with your company’s tax positions and liabilities, legal protections and situations, and finances, accounting methodologies, procedures and systems.  Irregularities, inaccuracies and other concerns found during this process will at the very least provide the opportunity for the buyer to re-open price negotiations, and quite possibly will be deal-breakers.
Low barrier to entry/ease to compete against.  If it’s relatively easy to set up in competition with your company, then the risk from competitors is greater, which makes your business less attractive to purchase.  Similarly it increases the prospects for a potential buyer to do that instead of buying your company.

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Paul is Zonata's founder and MD. He has a true passion for business and is massively excited by the opportunities that Zonata provides for its clients and partners. He loves helping owner-managed businesses be exceptionally successful, and enjoys the phenomenal quality of the people who work with him.

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