Acquirers are more likely to buy, and pay a good price for, a business if they are confident that they can grow it. A business that has zero growth in revenue and profitability is, in essence, slowly dying since its earnings are not keeping pace with long-term inflation. When nearing the time to sell a business, some business owners make the mistake of easing up on marketing and sales efforts. These sellers often underestimate the impact this will have on their ability to sell. They assume buyers will recognize that simply spending more time and energy on sales and marketing will increase the company's growth rate. There are three challenges when an owner elects to slow down their sales and marketing efforts near the time they want to sell:
A buyer will question the nature of the slow down and will need to be convinced the trend can easily be reversed;
Buyers are not inclined to pay for growth that they will be responsible for generating. When a buyer takes on the responsibility to grow a business, they consider such effort as value they bring to the table, not the seller, and thus will not compensate a seller for it; and
There are three primary drivers of business value: cash flow, risk, and growth. Businesses that have higher cash flow, are lower in risk, and have strong growth opportunities will tend to command the highest price. It's a gamble to count on two out of three of these to maximize value.
The best way to give a prospective buyer confidence that your business will continue to grow is to show positive historical growth. A business showing steady year-over-year growth, signals to buyers that simply continuing to operate the business “as is” may be sufficient to continue its growth. The more a business seller can communicate additional concrete growth opportunities and provide evidence that a buyer will likely be able to exploit those opportunities, the more marketable and valuable a business will be. Examples of ways to demonstrate growth potential include:
A beta test of a new product or service that shows strong market acceptance;
Evidence of unfulfilled customer inquiries because the company didn’t have the capacity or the right type of product or service;
Market research indicating a need in a new geographic market; or
Evidence of past results from a marketing activity that could be repeated in the future, but where the current owner chose not to pursue it in order to keep the business at a more manageable size.
For your particular business there may be other ways to demonstrate concrete opportunities for growth. Continue to focus on growth and you will have an easier time selling your business and likely for a better price and terms.
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