Seeing your business through a buyer’s eyes

Accountancy: Azets

It can be difficult to take a step back and see their business through the eyes of a buyer. However, this is precisely the way to grow its value.

For many buyers, the equation is simple. Balancing the price against the risk. This causes the price, in many ways, to be a function of the inherent risk.

An interesting observation from my career in mergers and acquisitions is that two businesses of similar size and profitability can attract vastly different valuations.

There are obvious drivers for those differences. For example, some industries are more attractive to buyers, which increases the price. However, the one that often goes under the radar is the story of the business and how this is framed. Can we highlight the quality and sustainability of the performance, rather than allow a buyer to put the pieces together to form their own story?

Manage the narrative

Part of the skill of negotiation is to answer buyer concerns before they are articulated. A common concern is whether there is a second-tier management team in place. If a seller starts by saying that they have worked hard to develop a second tier and that they need the deal to be right for them, the conversation automatically moves away from “Is there anyone else?” to “There are clearly strong people here – how do we keep them happy?” Contrast this with a response such as: “We have a few good people, but they are not ready yet.” And planning ahead by rewarding key staff with EMI (tax-advantaged share plan) options only enhances the story.

By decreasing the perceived risk, a seller is increasing their likelihood of a higher price.

There are further examples of common risks. Are the revenues diversified in both type and customer? Is the income recurring? How resilient is the business in an economic downturn?

A seller should review both their business and these key questions through the lens of a buyer, and take action to manage the narrative where possible. That is where planning for sale becomes a key tool.

Financial performance is, of course, still important. Being able to produce forecasts and evidence the reliability of the forecasts on a rolling basis is gold dust during a deal. A seller who can show monthly performance targets versus actual figures for historical periods will be protecting themselves against the biggest reason for deals failing to complete – lack of confidence in the numbers.

But while collating numbers is a more traditional preparation for sale, considering the buyer’s wider perspective will help build a strong defence to a rigorous due diligence process.

The owners who create the greatest value are often those who spend years building a business they would be excited to acquire themselves. This can sometimes be lost in the rush to target profits without the story to accompany them.