My partner and I met with the Managing Member of a Private Equity Fund recently who is currently seeking to make a new investment in a business with revenue between $2 million and $20 million. He was referred to us by someone thinking there could be synergy between our firm and his, as we are regularly in contact with business owners desirous of selling their business.
As we sought to understand the nature of the business the gentleman was hoping to purchase, he informed us that he had been searching for some time, had not a few professionals searching for him, and that he had performed due diligence on a number of businesses.
His due diligence includes tests for robust cash flow, a capable management team that was incentivized to remain in place at sale, a diversified customer base, operations that would support growth, financial controls and other value drivers. Despite all of this effort, he was still searching for a business that met his parameters and demonstrated "transferable value". Transferable value being the value of a business apart from its owner. One other important point -- it is not like this gentleman has narrowed his search to one or two industries. He made it clear to us that he would consider a business in any industry (other than a government contracting firm) within a 50 mile radius of Washington, DC.
As we explained to the gentleman our services and capabilities of building transferable value and exit planning, he responded "Based on my experience, there are many business owners who need what you do because they have not built a business that is transferable".
A business that has transferable value is characterized by...
- Next level management
- Systems and operations to support growth
- Recurring revenue
- Diversified customer base
- Proven growth strategy
- Demonstrated scalability
- Financial planning and controls
Will you and your business be ready if a "strategic" or "financial" buyer expresses interest in purchasing your business? Do you know how much $$$$ you will need net of taxes? Will you know if their offer is reasonable based on valuation and market conditions? Will the business pass pre-sale due diligence tests of a capable management team incentivized to remain at sale, diversified customer base and financial controls?
The gentleman commented that owners seem to think they can hurry up and get the business ready for sale when the owner is ready to sell, and how that simply isn't realistic. To pass the due diligence of a financial or strategic buyer, who is willing to pay what you want or need, you need to begin planning and building years in advance.