Traits of a Good Business
“How was the price determined?” Count on this question being asked and be ready with a credible answer. A lot of factors go into how to value a business.
Increasing Revenue & Cash Flow;
Business buyers today look for operations with revenue and cash flow increases of at least 5% per year for the last 3 years or at a minimum, solid performance during recessionary times.
Complete Financial Documentation:
Buyers want provable cash flow; a truly marketable business will be capable of providing the following financial records for at least the most recent 4 years:
1. Federal Tax Returns.
2. Income Statements (including year-over-year interim statements not older than 60 days)
3. Balance Sheets.
4. Current Depreciation Schedules.
Continuity of Ownership:
Has the business been owned by the seller for at least 5 years?
Buyers look for businesses with transferrable leases of about 5-7 years remaining on the lease or lease options or the possibility of facility ownership.
Pricing, Terms & Business Valuation:
The justification of this is the most important trait of a good business and will determine whether or not a business will sell. Buyers work on 2 primary principles; substitution and leverage. Substitution being the underlying principle of the Market Approach, which is; “A buyer will pay no more than he/she would have to pay to purchase an equally desirable substitute.” That substitute might not even be a similar business in the same area. Remember, at any given time there’s an estimated 2M businesses to choose from so providing reasons for a buyer to pick yours is critical. Additionally, like everyone else, buyers leverage their cash injection as a down payment and rely on financing (either commercial or seller) to complete the transaction. Other important traits include pre-arranged financing, justification of purchase tests, professional and credible representation, clear and precise financial records and demonstration of proper planning for sale to name a few.
Existing Management & Personnel:
Buyers need good people with good morale to ensure continuity. Is there management experience within the staff?
The 5 Basic Questions
A good Business can answer the following questions with ease.
1. What’s for sale?
2. Why’s it for sale?
3. How was the price determined?
4. What financing is available?
5. What’s the opportunity?