10 Things New Owners Look For When Buying a Business

“Boring” businesses face something of an image makeover as investors look for modest businesses, reliable profits and sound management.

While Australian startup funding rounds and venture capital investments deservedly grab headlines, investors and advisors say the real value is found in mature, homegrown businesses.

That’s good news for an aging group of founders looking to exit, but a promising buyout could be jeopardized if owners aren’t prepared or don’t get enough advice.

Strong market for profitable businesses

As a Corporate Finance Partner at BDO Australia, Gemma Lynam has direct experience of the M&A sector in Australia.

Speaking to SmartCompany, Lynam said investors were keen to use the services of proven Australian companies.

“We currently live in a reality where there are more buyers looking to get a home for their money than there are good companies looking to sell it,” she said.

“This typically translates into a high level of competition in the sales process.”

Many buyers want strong growth of 10% year-on-year, but this does not have to be the deciding factor.

Lynam said many potential investors are interested in companies that are not chasing future growth, achieving significant scale of operations or carving out a profitable niche.

“There’s a whole group of private equity investors in this sector who just want to get some level of regular dividend yield from their businesses,” Lynam continued.

“They don’t need high growth. They just need to make $X in profit year after year. That’s exactly what a lot of buyers are looking for.”

Other factors buyers want to consider include:

• EBITDA of $5 million or more
• EBITDA margins above 15%,
• The “secret sauce”, whether it’s intellectual property or significant competitive advantages in the marketplace,
• Diversified revenue streams by customer type, segment and geographic region,
• A large number of regular customers, including contracts,
• Focus on “countercyclical” markets with some degree of isolation from dominant economic trends,
• Independent management teams, separated from the shareholder structure,
• Backup systems to replace or supplement key suppliers and personnel.

Of course, business owners should consult professional advisors to consider how these factors may impact their planned sales.

Low quality information is a major sales barrier

Achieving and maintaining these factors is difficult, but for many indigenous Australian businesses it is not impossible.

However, translating the culture of a small or family business into a corporate structure and providing potential buyers with easy access to key data may prove to be a challenge.

“I think poor quality information is the single most important factor that will most likely delay the sale process,” Lynam said.

“That’s why it’s so important for companies to partner with advisors who can help them review existing documentation and make the necessary arrangements before they begin the sale process.”

While circumstances will vary by business, advisors can help secure legal documentation, align financial forecasts and streamline internal documentation ahead of a potential buyout.

While such checks can provide some “quick wins,” Lynam said, advisers should not be called in to hide underlying problems with a company.

“A buyer’s due diligence process will always catch any short-term solutions that aren’t sustainable, especially those related to revenue and profit margins,” she said.

“Therefore, there is no benefit in presenting a great-looking company to a buyer if, during the due diligence process, it turns out that the information or results presented are not naturally sustainable.”

Even if a family business achieves great success on its own, comprehensive changes may be necessary before an outside buyer decides to invest in it.

“If the family is heavily involved in the day-to-day running of the business, there is a certain level of risk involved,” Lynam said.

“If possible, it is very important to create a solid management team and appoint a succession team for key positions.”

A thorough and honest business analysis, conducted under the guidance of professional advisors, can help business founders address these challenges.

The potential reward? A beloved business that finds new and energetic owners, and a satisfying exit for the entrepreneurs who brought it to this point.

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