The 10 things new owners are looking for when buying a business
‘Boring’ businesses are facing something of a rebrand, as investors seek out low-key ventures, dependable profits, and sound management.
‘Boring’ businesses are facing something of a rebrand, as investors seek out low-key ventures, dependable profits, and sound management.
While Australian startup funding rounds and venture capital bets deservedly draw the headlines, investors and advisors say real value can be found in mature homegrown businesses.
That’s good news for an ageing cohort of business founders looking to exit, but a promising buy-out can be jeopardised if owners are unprepared or have insufficient advice.
Strong market for profitable businesses
As a corporate finance partner at BDO Australia, Gemma Lynam has a front-row seat to Australia’s mergers and acquisitions sector.
Speaking to SmartCompany, Lynam said there is significant investor appetite for reliable Australian businesses.
“The reality that we’re in at the moment is that there are currently more buyers out there looking to find a home for their money than there are quality businesses looking to sell,” she said.
“So this usually translates into a strong level of competition in the competitive sale process.”
Strong growth of 10% year-on-year is on the wishlist for many buyers, but it may not be a deal-breaker.
Lynam said many potential investors are keen on businesses that aren’t chasing future growth, having already achieved significant scale or carved a profitable niche.
“There’s a whole pool of private equity buyers in that space that are just looking to get some level of regular dividend yield out of the businesses,” Lynam continued.
“They don’t need strong growth. They just need year in, year out, punching out X dollars of profit. That’s absolutely what a lot of buyers are looking for.”
Other factors that buyers like to see include:
- EBITDA of $5 million or above,
- EBITDA margins greater than 15%,
- A “secret sauce”, be it owned intellectual property, or significant competitive advantages in the market,
- Diverse revenue streams, by customer type, segment, and geography,
- High quantities of repeat customers, including contracts,
- A focus on “counter-cyclical” markets with some degree of insulation from prevailing economic trends,
- Standalone management teams with separation from shareholder structure,
- Back-up systems to replace or supplement key suppliers and personnel.
Of course, business owners should consult professional advisers to consider how those factors may affect their planned sale.
Poor quality information a key barrier to sale
Those factors are difficult to achieve and maintain, but are not impossible for many homegrown Australian businesses.
What can be tricky, however, is translating a small or family-run business culture into a corporate structure, and ensuring vital data is easily accessible to potential buyers.
“I think poor quality information is the number one factor that’s likely to stall the sale process,” Lynam said.
“So it’s really critical for businesses to engage early with advisors who can assist to review the existing documentation, and do the necessary tidy-up prior to undertaking that sale process.”
While circumstances will necessarily vary between businesses, advisers can help shore up legal documentation, reconcile financial forecasts, and streamline in-house paperwork before a potential buy-out.
These checks can result in some “quick wins”, Lynam said, but advisers should not be called upon to disguise fundamental issues with a business.
“A buyer’s due diligence process will always pick up any quick fixes that are not sustainable, particularly those relating to revenue and profit margins,” she said.
“So there’s no advantage in presenting a great looking company to a buyer, when it becomes evident during the due diligence process the presented information or performance is not naturally sustainable.”
And even if a family-run business achieves great success on its own, holistic changes might be required before an external buyer takes a punt on the venture.
“If the family is heavily involved in the day-to-day running of the business, that introduces some level of risk,” Lynam said.
“Where possible, it’s really important to develop a sound management team, and have a succession team in place for the key positions.”
A careful and honest analysis of the business, guided by professional advisers, can help founders face those challenges.
The potential reward? A beloved business finding new and energetic owners, and a satisfactory exit for the entrepreneurs who built it to that point.
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