Getting a return on investment is the main motivation behind purchasing a business. Each prospective acquisition is evaluated based on the degree of possible future earnings the buyer feels the company can produce, the risk level associated with achieving these goals, and the allure of the sector in which the company works. Continue reading to discover how to create a valuable business for yourself.
What Makes a Business Valuable to Buyers?
When asking how to create a valuable business, the first step is gaining an understanding of what makes a business valuable to buyers.
Solid Financing
An ideal buyer will start by looking for a solid financial background. In a perfect world, the company would have had a consistent rise in profit over the previous two to three years, along with a corresponding rise in revenue. It may be preferable for the entrepreneur to hold off on selling the business until the financial results improve if the earnings and revenue numbers are erratic or indicate a declining trend.
Proven Track Record
Attractive or valuable enterprises exhibit a proven track record of success. They have an established consumer base, excellent internal systems, market awareness, and credibility. Additionally, they have a functional structure and strong cash flow.
Solid Systems and Processes
A business with solid systems and processes in place reassures buyers. The goal is to eliminate reliance on any one business owner (or key person) to the extent that the absence of the previous owner will have A business with solid systems and processes in place reassures buyers. The goal is to eliminate reliance on any one business owner (or key person) to the extent that the absence of the previous owner will have almost no effect on its operations. A good place to start having the business owner examine what he or she does for the business and identify other staff members who have the potential to take over specific responsibilities.
Booming Industry
Industry developments also affect consumer choices and a company’s worth. Businesses operating in a growth market, for instance, are often more valuable than those in a less booming industry because they stand a greater possibility of maintaining or increasing their revenues.
A company that produces and distributes eco-friendly items, for instance, would have had difficulty 20 years ago. A product or service that is environmentally friendly can, nevertheless, get a lot of marketing mileage in today’s market.
How To Create a Valuable Business By Negating Risk Factors
Any business is evaluated by buyers using a risk-based framework. If a well-run company with reliable processes and dependable workers poses less risk to a new owner. One of the first questions buyers ask is, ‘Why is the vendor selling?’. The vendor needs to be able to provide a genuine and consistent answer. Many legitimate reasons exist for exiting a business. These include:
- Wanting to sell to someone with more resources who can take the business to the next level
- Selling to someone who is younger with more energy
- Lifestyle reasons such as spending more time with the family or dealing with health issues
Due Diligence
By conducting a thorough due diligence examination, buyers lower their risk, while sellers strengthen their position by preparing their business for the scrutiny that potential buyers will subject it to. The seller may negotiate a higher final price if they are better prepared.
How dependent the company is on the present owner is one of the main concerns for buyers. This is a valid worry, according to research, since 40% of business owners believe their dependence on their company is entire and another 44% think it is significant. However, 71% feel another person could readily take over the firm if necessary.
The danger of purchasing a business rises if it looks that the majority of its goodwill is held by a single person.
Business Attractiveness
When considering how to create a valuable business, a tool such as the Maus Business Attractiveness Score reveals how attractive your business is to a potential buyer. You must always consider the reason the buyer wants to invest in your business when calculating your score. This may weight certain criteria in the Attractiveness Index to be more important than others.
According to the sort of buyer and the motive behind their purchase, attractiveness will be important. As an illustration, an owner/operator might buy a company to essentially give themselves a job. These purchasers typically spend between $100,000 and $1,000,000, so any firm listed for sale that is more expensive may not be appealing. Rarely will a multinational or huge corporation spend less than $1,000,000 when purchasing a firm for strategic reasons. If a company didn’t have enough profit and potential growth to warrant thorough due diligence, legal, and accounting expenditures, a multinational would not consider it.
Create a Valuable Business: Types of Buyers
There are essentially two categories of buyers in the owner/operator category. These customers include individuals who shop for fun and pastime as well as those who buy to advance in life.
The former will consist of those who are quite well-off and either at the end of their jobs or seeking a little downtime. In essence, they are looking to purchase a position in a field they find rewarding. They desire decent earnings and a job that is not stressful in an environment where they don’t have to put in a lot of effort.
Owner/operators looking to advance their business will seek the highest possible returns. Their choice of industry is influenced by experience, profitability, and growth. As long as there are reliable results, they don’t mind working hard or long hours.
A strategic investor (a big company that buys another company) usually wants to grow or get rid of a rival. They might recognize the following as having strategic advantages:
- Intellectual property
- New distribution channels
- Locking in supply
- New ways of approaching customers
- Management expertise
- Brand expansion
- International expansion
- Competitor buyout
- Employee skills
How to Create a Valuable Business with Maus Software
If you’re asking yourself how to create a valuable business, Maus can help. Our software to a great tool for closing the value gap and measuring the health of organisations.
Book a demo today and get started!