Wondering why buyers buy a business? They want a return on their investment! The more appealing the firm is, the bigger the perceived return on its investment. Of course, potential purchasers are willing to pay more for a business the more appealing it is.
Reasons Why Buyers Buy a Business
An indicator of how appealing your business is to a potential buyer is a tool like the Attractiveness Index. The buyer’s motivation for investing in your company must always be taken into account when determining your score. This could give some Attractiveness Index criteria a higher priority than others.
According to the sort of buyer and the motive behind their purchase, attractiveness will be important. For instance, an owner/operator might purchase a company primarily in order to secure employment. These customers would typically spend between $100,000 and $1,000,000, and rarely will a multinational or large company spend less than $1,000,000 when purchasing a company for strategic reasons. A multinational wouldn’t consider a company unless it had sufficient earnings and potential growth to warrant rigorous due diligence, legal, and accounting expenditures.
Types of Buyers
There are generally two categories of buyers in the owner/operator category: those who buy for fun and hobbies and those who buy to “get ahead.”
The former will consist of moderately well-off individuals who are either nearing the end of their careers or are trying to relax a bit. In essence, they are looking to purchase a position in a field they find rewarding. They desire a lucrative job with stable hours.
Owner/operators looking to advance their business will seek the highest possible returns. Their choice of industry is based on experience, profitability, and industry growth. As long as there are reliable results, they don’t mind working hard or long hours.
A strategic investor typically seeks to grow or remove a rival. They may be considering growth and recognize the following as having strategic advantages:
- Intellectual property
- New distribution channels
- Locking in the supply
- New ways of approaching customers
- Management expertise Brand expansion
- International expansion
- Competitor buyout
- Employee skills
Why Buyers Buy a Business: Security
The following elements provide the potential purchaser security:
- Confirming a solid financial history
- Records show that profits have been rising steadily for the past two to three years, and sales have also been rising steadily throughout that time.
- positioning the company as an excellent, low-risk investment
- highlighting a client base with a history, reliable internal systems, brand recognition and credibility, an operating plan, and a financial flow
- showcasing favourable industry trends
- highlighting client accolades, recommendations, or even a product or service that adheres to environmental standards
- ensuring that the company does not appear to be dependent on the owner and that a succession of employees is available in case the current owner passes away
By conducting a comprehensive examination of the company, buyers can lower their risk. By preparing for the examination that potential buyers will apply to the business, sellers can improve their position. The seller may negotiate a higher final price if they are better prepared.
After thousands of hours of research into the business sale process, the MAUS Institute of Education and Training developed the Attractiveness Index and the Readiness Index. You can grasp the Attractiveness Index only from this report. It is advised that you contact your consultants to set up a program of value enhancement and to do a thorough Readiness assessment of your company.
Business Factors
If buying your firm carries less risk, it will be much more appealing. The risk here refers to the likelihood that your company will remain profitable after you have left. Your management staff will be a topic of interest to potential buyers. Are they strong and knowledgeable enough to continue running the company? In your absence, can they still innovate and provide for the business clients?
Why buyers buy a business means knowing the prospective acquirer will review your business model as part of this process. The value of your business will increase as your business model, technologies, and procedures become more automated and reliable. The buyer won’t have to reinvent the wheel thanks to a solid company model. Any new buyer will also be extremely interested in the quality of your customers and their loyalty to your business. Your current customers provide a great deal of goodwill in the business.
Forecast Factors
You should take into account the fact that your company’s value is derived from the quantity of revenue it brings in when thinking about selling it. When a buyer buys a business they will want to analyze your prior financials when considering your business. They’ll demand to see a realistic, historically based future budget that takes into account projected growth rates. Your budget gains certainty if your company generates recurrent revenue.
It’s crucial to be able to support your growth when creating a budget with information on product development, market penetration, or the application of various marketing methods. These notes ought to be realistically correlated with the figures in your budget.
Market Factors
Understanding why buyers buy a business means knowing that any prospective buyer will want to look through your company’s prior expansion. Your products, your business plan, and the market will all show the potential of your company. As a result, your products must be brand new, innovative, and have a development process. It is ideal if you are conducting business in markets with rapid growth and untapped possibilities. In order to assure you obtain the future maximum value, you must examine your markets and goods and design a program 12 to 36 months before you plan to sell your business.
Your competition is one factor that you cannot control, but you should aim to position yourself so that you are either the market leader or at the very least the market leader in a specific area. Make sure there are substantial hurdles preventing competitors from entering the market. These obstacles may be the result of long-standing connections with influential people, fixed agreements with important suppliers, specialized capital equipment, or even a highly qualified product development program.
Investor Considerations
Depending on why buyers buy a business, your firm may occasionally be worth twice as much. A tiny buyer will only consider your company’s value in terms of the profits it will make in the future. A strategic buyer, like a global corporation, will consider the value your company could contribute to their operations. For instance, even if you have produced the products, your size and financial resources may only allow you to sell to a tiny market. A multinational may have distribution networks in 30 different nations and believe that by purchasing your company, they might profit 20 times more than you currently do.
This is merely one justification for a strategic buyer’s higher price. Think about potential strategic buyers 12–36 months before selling the firm, and position your company so that you stand out to them.
It is not a good idea to mention that you are selling your firm during negotiations simply because it is difficult and stressful. A better explanation might be that you have successfully developed your company using a strong business strategy and that you now require access to funding and distribution channels in order to increase profitability. It is crucial that you consider your selling motivation and avoid selling out of desperation.
Now You Know Why Buyers Buy a Business
Now you should have a better understanding of why buyers buy a business. Maus can assist if you’re looking to make your business more attractive to buyers. business. Our program is a fantastic tool for monitoring organizational health and bridging the value gap.
Book a demo today and get started!