Recent research conducted by the International Business Brokers Association (IBBA) has revealed that only about 20% of businesses listed for sale actually find buyers. This statistic underscores the importance of understanding what makes a business "sellable."
In this blog, we will explore the key factors that determine a business's sellability and provide a roadmap to enhance a business's chances of attracting the right buyer. We'll cover essential aspects such as financial health, market position, scalability, and operational efficiency. Additionally, we'll discuss the steps to prepare a business for sale and attract potential acquirers.
1. What Makes a Business Attractive to Potential Acquirers?
For a more in-depth discussion, you can refer to our previous blog post here: Preparing a Business for an Eventual Sale. Here's a summary of the key points covered in that post:
Financial Health: The financial well-being of a business is a critical factor that potential acquirers consider. Ensuring that the business is profitable and generates positive cash flow is most often the basis for determining an appropriate valuation. A robust consistent financial performance can significantly enhance the business's appeal to prospective buyers.
Market Position and Competitive Advantage: A strong market position and a competitive advantage are essential for making a business stand out. Acquirers are more likely to be interested in a business that holds a prominent position in its industry and offers a unique selling point.
Scalability and Growth Potential: The potential for growth and scalability in a business's operations is highly appealing to acquirers. They seek opportunities for expansion and increasing revenue. In a strategic acquisition, an acquirer may aim to integrate a target product into their distribution channels or vice versa. In either case, growth can justify a higher purchase price.
Operational Efficiency: Efficient operations often lead to higher profit margins and a dominant market presence. A poorly run business may result in lower profit margins, which can lead to lower valuations from acquirers. However, even a poorly run operation in a promising industry may still be acquired as the acquirer plans to apply their operational expertise to the target company. However, this will typically result in a lower valuation to the seller.
Transferable Customer Base and Relationships: A loyal customer base and strong customer relationships hold significant value for any business. Prospective buyers often seek businesses with a committed customer following (i.e., customers who buy regularly from the business) and a strong reputation. It's important to ensure that these customer relationships are tied to the company rather than a specific individual, making them transferable to a new owner.
"Strategic Fit" with Acquirer's Plans: The alignment of your business with an acquirer's strategic goals can be a driving factor in an acquisition. For instance, if a company is establishing a foothold in a new geographic area or a different segment of the industry, and the target business is a leader in that segment, the company may choose to acquire the foothold rather than build it from scratch.
2. How Well Does It Score on an Acquirer Scorecard?
Acquirers often use a scorecard to assess potential acquisition opportunities. How well a business scores on this scorecard can determine whether it gets acquired or passed over.
As an example, consider three firms in the healthcare industry—A, B, and C—with the following characteristics:
A is a Healthcare Staffing Firm located in the fast-growing Southeastern US.
Revenue of $15M
Operating Profit of $3M (20% operating margins)
Works with 200 independent physician groups across 2 states
Often serves as the sole source staffer for physician groups seeking hard-to-find talent
Consistently grew between 15% and 30% year over year for the past 3 years
Boasts a strong bench of middle management talent overseeing day-to-day operations.
B is a Physician-Operated Multi-site Medical Clinic with 10 locations in the Northeast US.
Revenue of $20M
Operating Profit of -$2M (-10% operating margins)
Primarily caters to Medicare patients
Faces difficulties in finding physicians to expand capacity
Experienced fluctuating growth between -10% and 5% year over year for the past 3 years
Recently lost coverage from a major insurer
C is another Healthcare Staffing Firm located in the fast-growing Southwestern US.
Revenue of $5M
Operating Profit of $2.5M (50% operating margins)
Works with large hospitals in the Arizona and California region
The owner has strong relationships with large hospital administrators
Competes in a lengthy RFP process with other staffing firms every year
Maintained flat growth over the last 3 years but experienced significant growth in the last year due to a major deal accounting for 33% of revenues (50% growth year over year).
In the healthcare industry, an acquirer may view A as an attractive acquisition, B as unsuitable, and C as having too many obstacles to overcome in a deal. Depending on other opportunities being considered, an acquirer may proceed with acquiring A while passing on B and C.
Fortunately, businesses like B can improve their prospects. Stay tuned for an upcoming blog post dedicated to Acquisition Scorecards from the Buyer’s Perspective.
3. How Well Prepared is the Business for a Sale?
Most businesses can improve their prospects for a potential sale. Experienced M&A professionals can assess a business and create an action plan to enhance its sellability. This plan may involve identifying expansion opportunities, improving profitability, organizing business data, ensuring regulatory compliance, and mitigating potential deal-breakers.
While professional M&A representation is not mandatory for a potential sale, having one significantly increases the chances of successfully selling a business. Many acquirers also prefer sellers to have professional M&A representation to prepare necessary financial and due diligence documents for their review.
Summary
In summary, it's crucial not to rush to market without proactively improving a business's sale prospects. By understanding what makes a business attractive to potential acquirers, business owners can work towards their desired end result. Experienced M&A professionals can assist in devising an action plan to enhance a business's market prospects and position it for future success.