What Do Buyers Expect?
For sellers, the whole process is relatively simple: They may say it’s not just about the money, but in truth, it is. Sellers also want a quick process, most of their money upfront, and a reasonable expectation that any deferred compensation will actually be paid. They’re usually concerned that the buyer will take good care of their employees, customers, suppliers, and other stakeholders, and that the seller’s responsibilities after closing, if any, be acceptable.
Buyers also rightfully expect a lot when they are looking to acquire a company. They are typically paying quite bit of money (which might not be theirs) and they want a return on that investment, so they naturally have a long list of expectations. By knowing what buyers expect, sellers in any industry can better prepare and therefore get a higher valuation with more favorable terms.
Here are some things that buyers expect:
Cash Flow
In the end, it’s all about cash flow for now and in the future (including a future sale to a subsequent buyer). Buyers are interested in all aspects of the business, but it all boils down to how the business will generate cash and what the risk factors are that will affect that cash. Sellers have a much more emotional connection with the business, so it is often difficult for them to accept that it is all about dollars and cents. Most businesses have a lot of value in intangible assets, such as brand name, culture, and the “black magic” of being able to make high-quality boards and assemblies. However, if the buyer cannot figure out how to continue that magic, it becomes more of a risk factor than an asset. Sellers should understand how the business generates cash and how it will grow that cash flow.
Financials
For many small businesses, look at your checkbook and you can tell that you are making good money. Well-organized financial reporting will explain to outsiders how the business makes money. If the financials are reviewed or audited by an outside CPA, it helps to verify that the financials are true. It also makes the sale process a million times easier. Many buyers, especially publicly-traded or private equity-backed companies, will require substantially more financial reporting than private owners. If the business’ financials are inaccurate, slow, and disorganized, buyers will factor into their offer the amount of time and investment required to get up to snuff. Also, too many adjustments or book-cooking will turn off most buyers.
Management Team
A key aspect of any business is the management team. If the business is too reliant on an owner who has already bought an awesome fishing boat and a retirement house on the beach, buyers will be worried that they cannot find a replacement in time. Most buyers want to meet the team early in the process, while many sellers do not want anyone meeting their team until the last minute. It is best to have a team that not only can run the business without the owner, but also be trusted to meet with buyers.
Equipment/Facility
Buyers will want to see that the equipment and facility are up-to-date and capable of handling some expansion. Otherwise, they may deduct any real or perceived investment deficit from their offer. If your employee of the month has been the repair guy for the past six months, for example, or your aisles look like something from “Hoarders,” it might be a problem.
Honesty, and Full and Quick Disclosure
Many sellers feel that they do not need to disclose issues and that it is the buyer’s responsibility to find things out. In reality, buyers will eventually find things out, but they’ll penalize the business more the later in the process. Worst of all, if they find negative things after closing that should have been disclosed, it can lead to lawsuits. All businesses have warts, including Apple and IBM, so there is no way that a $10 million revenue business is squeaky clean. Be sure to disclose whatever issues are known. If something comes up during the process, such as a big customer cancelling orders or your CFO deciding to backpack around the globe, disclose it quickly and fully.
Strategic and Cultural Fit
Strategic buyers (those in the same industry as the seller) are often looking to buy companies that are a great fit. The business might be run like a family, but does the family more resemble the Addams, Corleones, or the Simpsons? Sellers should be able to communicate their strategy and culture accurately.
Cost Synergies
Buyers like to see some level of cost synergies, at least in terms of buying power. Even if the buyer plans to keep everything in place, there are always some expenses that are duplicated. Most likely, those savings will be offset by investments in growth.
Growth Potential, Margin Expansion
Sellers should think about what reasonable growth opportunities exist. For example, the company has great products and technology, but cannot afford enough sales and marketing to get the word out. Or, large customers have not trusted a small shop with major orders, but if the company has bigger pockets, it might be able to capture larger orders. Buyers will look at how they might improve gross margins and other profitability ratios, but they probably will not tell the seller their plans. The more the seller can do to improve their performance prior to a sale, the better the deal. In other words, make those changes that you know you should make, like getting rid of your nephew who eats glue and always comes in late.
Different buyers will expect different things, but these eight things are the biggies. By understanding what buyers want, sellers can better prepare and get a nicer deal for themselves.
Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries. GP Ventures has offices in Chicago and Tokyo, with five people in total. Tom Kastner is a registered representative of, and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida, member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.
