What buyers look for

Two questions behind every price

What buyers look for in a business comes down to two questions: what the company earns for its owner, and how confident a new owner can be that those earnings will continue. The first sets the base of the price. The second sets the multiple applied to it. Each quality below either raises that confidence or lowers it.

Earnings that can be proven

A buyer prices earnings, not revenue, and only the earnings it can verify. For an owner-run company the measure is usually seller's discretionary earnings; for a larger company with a management team, it is usually EBITDA. Every adjustment to profit, such as the owner's salary or a one-time repair, needs a paper trail. The financial statements should match the tax returns, because buyers read one against the other, and a gap between them makes every figure in the transaction suspect. How a business is priced explains the arithmetic.

Revenue that recurs

Work that is contracted and renews without being sold again is often the most valuable thing a service company owns. A buyer wants to see it separated from one-time work, in a schedule that shows each contract, its frequency, its price and its renewal history. Recurring revenue blended into a single total earns little credit; the same revenue documented and separated tends to support a higher multiple. A buyer also reads the history behind it: whether customers have accepted price increases, whether renewals hold, and whether the contracts pass to a new owner without the customer's consent.

A spread of customers

Where one customer accounts for a large share of revenue, a buyer prices what happens if that customer leaves. Concentration is easy for a buyer to find in a revenue report and slow for an owner to correct, so it is better addressed well before a sale and, where it cannot be corrected, disclosed early with a plan attached. The same reasoning applies to suppliers: a company that depends on one supplier, or on one referral source for its work, carries a risk a buyer will price.

A business that runs without the owner

In many founder-owned companies, the operating manual is the owner: who quotes the work, who takes which call, who knows the customers. A buyer prices that dependence as risk. Written procedures, a manager or team who can run each part of the business, and customer relationships held by more than one person all show a buyer that the company is a system rather than a personality.

People, licenses and contracts that transfer

A buyer wants to know what stays after closing. Key employees under agreement are an asset; key employees on a handshake are a question. Where the company operates under licenses, the buyer will ask early who holds them and whether they continue under new ownership. Customer contracts, the lease and supplier agreements should be read for terms that a change of ownership would trigger. What buyers will ask for lists the documents behind each of these.

Room to grow

Buyers pay for the future as well as the past. A company with services it could extend, territory it does not yet cover or customers it could serve more fully gives a buyer a reason to pay for more than its present earnings. Different buyers see different room: a strategic acquirer may see what the company adds to its own operations, and a private equity firm may see the foundation of a larger group.

A clean record

Buyers also look for what they hope not to find: unresolved disputes, tax questions, undocumented liabilities, equipment described as owned that is in fact financed. None of these need end a sale. What ends sales is finding them late. A problem disclosed at the outset is priced once and set aside; the same problem discovered in diligence raises the question of what else was not mentioned. Diligence and closing describes how buyers verify all of this.

Different buyers, different weights

Every buyer weighs these qualities, but not equally. A strategic acquirer already in the sector may care less about the owner's role, because it has managers of its own, and more about the customers, the licenses and the location the company brings. A private equity firm buying the foundation of a group cares most about management and the room to grow. An individual buying a company to run often relies on a bank loan, so the lender's view of the earnings matters, and a seller note may form part of the price. Knowing which buyers are likely to be most interested shows which qualities to strengthen first.

Seeing the company as a buyer will

Most of what buyers look for can be improved, though rarely quickly. Wild Rose Advisors provides a written assessment of value that sets out how each kind of buyer is likely to view the company and which actions would move the figure, at no cost and without obligation. The firm's readiness work then addresses those actions in order, and the estimate at how much is my business worth gives a first range in the meantime. The stages that follow are set out in how to sell my business.

Common questions