How to Build a Business Buyers Will Pay More For

If you’re thinking of selling your business in the coming years, the time to start preparing is now.

Most owners call an investment banker when they are ready to sell. By then, the banker is selling the business as it exists. They can market it better, but they cannot give you back the years you needed to make it better.

Problems that depress margins, weaken earnings or create unnecessary risk may take time to fix. And some improvements need time before they show up convincingly in the company’s results.

Look at the Business Through a Buyer's Eyes

As the owner, you spend your time running the company. You know how it works, why certain decisions were made and which problems you know how to handle.

A future buyer does not have that history or that knowledge.

One of the first questions they will ask is:

What could go wrong after I buy this business?

Can the company run without the owner? Is the management team strong enough? Are the systems and processes dependable? Are customers concentrated? Will important relationships survive a change in ownership? Are there risks or weaknesses that have not yet become obvious?

The more uncertainty a buyer sees, the less they are likely to pay.

But reducing risk is only half of the equation.

A buyer is also asking:

Why would I want to own this business instead of another one?

Buyers value strong margins, predictable earnings, recurring revenue, capable management, loyal customers, a defensible market position, opportunities for growth and a company that doesn’t depend on the owner for every important decision.

Sometimes You Have to Let Go of What Is Hurting the Business

I recently looked at a company that had a product line that had become an albatross.

The margins were poor. It consumed management time and attention. It also made the overall financial performance of the company look worse.

The owners knew it was a problem, but they did not want to sell it because they would have to accept less than they had invested in it.

Nobody likes taking a loss.

But they were protecting the value of one bad product line at the expense of the value of the entire company.

Selling it would have generated cash, eliminated an ongoing distraction and improved the margins of the remaining business. Give those changes a year to show up in the financials, and a future buyer would be looking at a cleaner, more profitable company with an actual track record.

The product line was hurting them twice: it was reducing earnings today and reducing the value of the company they eventually wanted to sell.

The loss they were trying to avoid on one product line could have been worth multiples of that amount in the value of the remaining company.

That kind of decision can be difficult when you are inside the business. You remember what you invested, what you hoped the product would become and how much work went into building it.

A buyer doesn’t care what you originally invested or hoped it would become. They care about the business they’re buying today.

Improve the Business Before You Have to Explain It

You may find product lines, expenses, customer relationships, management gaps or operating practices that make sense internally but reduce the attractiveness of the company to an outside buyer.

Some issues can be fixed quickly. Others take time, and the improvement may need even more time before it becomes visible in the company’s actual performance.

A buyer is going to be much more comfortable seeing improved margins for the last 18 months than hearing that margins are expected to improve next year.

Buyers place more value on results you can prove than improvements you promise.

That is why the years before a sale matter.

If something is reducing the value of the company, you still have time to address it. If something could make the company more valuable, you still have time to strengthen it. And most importantly, you have time to let the results demonstrate that the changes worked.

Reduce What Buyers Fear. Strengthen What Buyers Want.

Preparing a business for sale is not simply about cleaning things up.

It is about looking across the company and asking two questions:

What is reducing the value of this business?

What could make this business more attractive to a buyer?

Those are very different questions from, “How do I get ready to sell?”

The objective is not to dress up the company shortly before it goes to market. It is to improve the business itself while you still have the time to do it.

Reduce the risks buyers will see.
Strengthen what buyers will value.
Build the business you would want to buy.

The goal is to reach the point where a future buyer can look at the company and think:

I understand why this business works. I understand the risks. I see the opportunity. I want to own it.

That is the business a buyer is more likely to pay a premium to own.

The goal is not to make your business look better when you sell it.
The goal is to make it a better business before you sell it.

Building a Better Business Is Only the First Step

Improving the underlying business is only the first part of preparing for a sale. A future buyer also needs to be able to understand, trust and verify what you have built.

Why Rick's Perspective Matters

Rick Norris, CFA has spent more than 35 years working with businesses from multiple perspectives: as an advisor, a buyer, a seller and an operator.

His experience includes more than 300 mergers, acquisitions and financing transactions at Bank of New York Mellon, including helping finance Disney’s acquisition of ABC and working on transactions involving Microsoft, Intel and Hilton Hotels. He has also founded, bought, operated and sold businesses of his own.

That combination gives Rick the perspective to see both how a business operates today and how a future buyer is likely to evaluate it.

See Rick Norris’s full bio