What Buyers Look For in a Good Business

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RELEASE DATE: March 21, 2024

SHOW NOTES:

Boss Talk EP 3: What Buyers Look For in a Good Business

In episode three of the 'Boss Talk' podcast, hosts Jim Parker and Carey Sobel delve into the subjective nature of what makes a business "good" from a buyer's perspective. They discuss how the motivations of buyers vary—ranging from individuals seeking to buy a job to large private equity groups looking for strategic acquisitions. Despite these differences, there are universal aspects buyers seek, such as financial stability, appropriate pricing, and the potential for growth. The episode covers critical topics like business valuation, the importance of financials, pricing strategies, the role of business continuity, and the ideal attributes of a sellable business. It also touches on the impact of the owner's involvement, the staff's skills and stability, customer base diversity, and the underlying opportunities for business growth. Additionally, Jim and Carey emphasize the significance of the seller's character, business history, infrastructure, and growth potential in defining a good business in the eyes of potential buyers.

00:00 Welcome to Boss Talk: Understanding What Buyers Look for in a Business 

01:00 Diving Deep into Financial Stability and Business Valuation

09:44 The Importance of Business Continuity and Owner Involvement

13:34 Building a Skilled Workforce and Preparing for Sale

20:20 Navigating Client Concentration and Enhancing Business Appeal

27:21 Unlocking the Power of Recurring Revenue in Business Sales

27:59 The Importance of a Loyal Customer Base

29:02 The Seller's Character: A Key Factor in Business Transactions

31:55 The Role of Business Tenure and Owner Motivation in Sales

33:37 Growth Potential: The Driving Force Behind Business Acquisitions

38:01 Industry Stability and the Impact of External Factors

41:42 Evaluating a Business: Reputation, Culture, and Facilities 

48:19 Preparing Your Business for Sale: Insights for Sellers

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What Buyers Look for in a Good Business: Insights from Boss Talk Ep. 3

When it comes to buying and selling businesses, understanding what catches a buyer's eye can greatly influence the sale process. In this episode of Boss Talk, Jim Parker alongside Cary Sobel delves deep into what defines a 'good' business from a buyer's perspective. The subjectivity of 'goodness,' how it varies across different buyers, and universal signs of a solid business foundation are uncovered through their expert insights.

The Subjectivity of 'Good' in Business

First and foremost, the term 'good' is inherently subjective. What one buyer might consider a lucrative investment, another might disregard due to different expectations or strategic fit. Buyers could range from individuals seeking employment through business ownership to large equity groups looking for a strategic acquisition. Regardless of these differences, some universal criteria tend to stand out.

Key Criteria

1. **Financial Stability**: The most glaring indicator of a good business is its financial health. Buyers want assurance that the business they are investing in has a solid financial foundation. This encompasses more than just profitability; it includes pricing strategies, business valuation (like SDE and EBITDA), and a clear understanding of the business's financials.
   
2. **Price versus Value**: A business needs to be priced correctly. Overpricing is a common reason why businesses stay on the market unsold. Buyers critically evaluate the asking price against EBITDA or discretionary earnings number. If the figures don't align, interest wanes quickly.

3. **Growth and Trends**: Buyers look for signs of stability and growth. A business showing consistent upward trends entices buyers more than a business with stagnation or erratic spike. Moreover, the backstory explaining these trends (for instance, historical performance during recession periods or sharp growth due to an unusual event) is equally important.

4. **Business Continuity and Ownership Role**: Buyers are cautious about businesses heavily dependent on their current owner for daily operations. Businesses with well-documented processes, where the owner plays a managerial rather than operational role, are more attractive.

5. **Skilled Workforce and Employee Retention**: Having a team that can run the business efficiently without the old owner is a positive sign. High turnover rates can be a warning sign, whereas a stable, skilled workforce adds value to the business.

6. **Client and Revenue Base**: A diverse client base with no single client contributing a significant chunk of revenue reduces risk for the buyer. Recurring revenue models are particularly attractive as they predict future earnings more reliably.

7. **Scalability and Growth Potential**: The ability to grow the business post-acquisition is crucial. Buyers evaluate the existing market, competition, and internal business processes to gauge scalability.

8. **Sellers’ Integrity and Business Reputation**: The integrity, honesty, and reputation of the seller can significantly affect the sale. Buyers prefer dealing with trustworthy sellers, as the transition involves many leaps of faith.

9. **Industry Stability and Future Proofing**: A business resilient to recessions and technological disruptions (like ecommerce or automation replacing manual services) stands out. Buyers want businesses that have a foreseeable future in their current industry.

Takeaways for Sellers

Understanding what buyers are looking for can greatly help in preparing your business for sale. Whether it's fine-tuning your business's financials, documenting processes, diversifying your client base, or simply improving your business's online reviews and reputation, these elements can significantly influence a buyer's decision.

For sellers, the key takeaway is to view their business through a buyer's lens. It could involve strategic adjustments or simply highlighting the strengths already present. Ultimately, the goal is to showcase a business that not only looks attractive on paper but is genuinely poised for success under new ownership.

By focusing on these criteria, sellers can significantly improve their prospects in the competitive market of business sales, ensuring that their offer stands out to potential buyers as a 'good' and solid investment.

PODCAST TOPIC KEYWORDS:

Boss Talk, Jim Parker, Carey Sobel, Good Business, Buyer, Seller,