Exit strategies (what type of businesses sell easily?)

[Baker]

Hey all, was just thinking about acquisitions and exit strategies and wanted your opinions on the types of businesses that are easiest to sell to a larger company. For example would different product based businesses appeal more to companies looking at buying a business? Or does it depend on the industry? Just looking to spark a discussion and learn more about acquisitions/exit strategies.

 

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[luniac]

https://www.thefastlaneforum.com/co...rrari-should-i-buy-i-have-twenty-bucks.52834/

 

[Vigilante]

Hey all, was just thinking about acquisitions and exit strategies and wanted your opinions on the types of businesses that are easiest to sell to a larger company. For example would different product based businesses appeal more to companies looking at buying a business? Or does it depend on the industry? Just looking to spark a discussion and learn more about acquisitions/exit strategies.

The easiest businesses to sell are businesses that are profitable, have no debt, have minimal fixed expenses, and are undervalued.

 

[WestCoast]

The easiest businesses to sell are businesses that are profitable, have no debt, have minimal fixed expenses, and are undervalued.

I agree with most of this. Basically, a business that makes money (which you can measure in a lot of ways, and manipulate in a lot of ways....be careful), will sell.

Business operations can be done any strange way, in any market/niche, and it if generates cash flow and positive return at the end of the year, it is worth something to someone.

--
That said, I don't like the 'undervalued' comment. Assuming we aren't talking about blue-chip companies on the NYSE, I don't think a business can be 'under-valued' or 'over-valued'

Most small businesses ($250k-$1M) will have 1-3 people consider buying it. You won't have suitors lined up around the block.
The buyers will generally be unsophisticated and trying to figure out what it's worth just like the business owner is trying to figure out same.

$1M to $5M, you probably have more serious folks, maybe an IB helping you out a little bit as a side project of theirs.

But.... my point is. The price will be what someone is willing to pay. I don't know if that's 'under or overvalued' compared to what it 'should' sell for. But, as my dad taught me years ago: something is worth what someone pays for it. That's the price.

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Focus on making money. Have a reasonable gross margin, and make sure you are netting something at the end (something I have mis managed in the past, been too focused on growing the top line, dumb!). Don't be dependent on one customer - have a number of them (less risk).

Show consistent smart uses of debt if you have to, but have limited (none is best) long term debt on the books.
Show growth, but not at the expense of being out of control.

You want the business to be stable, nicely growing and profitable to maximize what someone will pay for it.

Above comments are for small businesses, I'm sure the game is different above $10M or so, but that's not my expertise.


--
In short, doesn't matter WHAT you do. Do it well, make money, take care of your customers, and any business will sell.

 

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[Vigilante]

I agree with most of this. Basically, a business that makes money (which you can measure in a lot of ways, and manipulate in a lot of ways....be careful), will sell.

Business operations can be done any strange way, in any market/niche, and it if generates cash flow and positive return at the end of the year, it is worth something to someone.

--
That said, I don't like the 'undervalued' comment. Assuming we aren't talking about blue-chip companies on the NYSE, I don't think a business can be 'under-valued' or 'over-valued'

Most small businesses ($250k-$1M) will have 1-3 people consider buying it. You won't have suitors lined up around the block.
The buyers will generally be unsophisticated and trying to figure out what it's worth just like the business owner is trying to figure out same.

$1M to $5M, you probably have more serious folks, maybe an IB helping you out a little bit as a side project of theirs.

But.... my point is. The price will be what someone is willing to pay. I don't know if that's 'under or overvalued' compared to what it 'should' sell for. But, as my dad taught me years ago: something is worth what someone pays for it. That's the price.

--
Focus on making money. Have a reasonable gross margin, and make sure you are netting something at the end (something I have mis managed in the past, been too focused on growing the top line, dumb!). Don't be dependent on one customer - have a number of them (less risk).

Show consistent smart uses of debt if you have to, but have limited (none is best) long term debt on the books.
Show growth, but not at the expense of being out of control.

You want the business to be stable, nicely growing and profitable to maximize what someone will pay for it.

Above comments are for small businesses, I'm sure the game is different above $10M or so, but that's not my expertise.


--
In short, doesn't matter WHAT you do. Do it well, make money, take care of your customers, and any business will sell.

Almost not worth responding to, because we agree in principle. But... for clarity, of COURSE a business can be undervalued.

It does $1m top line a year, with a 30% net, net profit. The owner runs into tax problems, and needs a quick solution. He'll take $150k for it.

That's undervalued. Don't overcomplicate it.

 

[Eskil]

To add to what has already been said;

Profatibility is great, but sustainability, potential for growth, and level of automation are also key factors that will determine how "sellable" (or how attractive) your business is to potential buyers.

- How reliant is the business on YOU, or any single person who may have special understanding of the day to day operations? How easily can a buyer replace you or that someone without putting a ton of resources entirely training themselves or a replacement. The less dependent your business is on you or a certain day to day operator - the better. Same goes for any staff you may have. Can/will they easily follow along and transition, or if not, can new people replace those resources without too much hassle. The closer to 'turn key' a business is, and the more automated and streamlined processes it has in place, the better.

- Is the cash flow fairly predictable throughout a year or is it reliant on seasonal/periodical spikes? Is the business model based on trends that may fade out in a few years, or is it suited for the long term? One-trick ponies can be sketchy, as markets are ever evolving. Are there competitors looming on the horizon that could drive profitability into the toilet a year from now? How will the business keep on driving sales for a long time to come? Branding, product line (or service) diversity, lifetime customer value, etc. are important.

- What portion of revenue comes from new customers, and how much of it from repeat sales? Is there room for growth in either?
Back-end sales (sales from previous/existing customers) is gold. Having a large number of customers in itself can be immensely valueable. Moreso even in the IT world of apps and software. Valuation is often based on number of users, sometimes even without having revenue (look at the massive acquisitions of things like Instagram). In those cases, it's not the users directly providing revenue - but it's what can be sold to 3rd parties (such as advertisers) because the user base is there and can be targeted.

 

[throttleforward]

How reliant is the business on YOU, or any single person who may have special understanding of the day to day operations? How easily can a buyer replace you or that someone without putting a ton of resources entirely training themselves or a replacement. The less dependent your business is on you or a certain day to day operator - the better. Same goes for any staff you may have. Can/will they easily follow along and transition, or if not, can new people replace those resources without too much hassle. The closer to 'turn key' a business is, and the more automated and streamlined processes it has in place, the better.

To build on this, I've seen a number of businesses fail to sell because clients/customers refused to work with anyone but the principle/owner. If you stake your business on personal relationships you're going to have a hard time selling.

 

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[SteveO]

The bottom line is that most money is made on a sale. Cashflow is great but usually not enough compared to the proceeds that can come from a sale. Thus, you must have a process that will lather, rinse, and repeat.

I find that the most value can be added to a business when you can buy one that few people want and sell one that many want. Buy the shit-hole, sell the diamond. Of course you have to be able to turn it into one first.

This process is made easier if you buy into downswings in the economy and sell into upswings. Although those cycles are far between, much money can be made as a result.

 

[brickco]

If you want the boring, true, answer: The easiest businesses to sell are businesses with most of their value in real estate. Second on the list would be businesses in distribution that have a lot of other (non-RE) assets (I.e., hard inventory).

It's very hard to predict what the goodwill (tangible assets minus tangible liabilities) of any business will be at sale-time, so businesses that sell closer to their liquidation value will sell faster.

 

[Andrew Cassin]

Hey all, was just thinking about acquisitions and exit strategies and wanted your opinions on the types of businesses that are easiest to sell to a larger company. For example would different product based businesses appeal more to companies looking at buying a business? Or does it depend on the industry? Just looking to spark a discussion and learn more about acquisitions/exit strategies.

The simple answer to your question is rooted in another: why do people buy anything? In corporate M&A, companies buy other companies because the target fills a strategic need. It offers geographic expansion, scale, capability, growth acceleration, even people. Sometimes acquisitions are predicated on vanity - or fear- whilst others are driven by public markets (public companies often need to acquire top line revenue growth to resuscitate a stock price, irrespective of whether or not the deal yields profit).

Privately-owned businesses are simply assets in a huge marketplace, all competing for the investor dollar. If you have a business, take the time to understand how, why and where buyers do deals, and who they are. The key principle in business exits is to "know thy buyer".

For more insights, you can purchase a copy of my book on Amazon. It is called On Your Terms: 101 ways to prepare a business for sale or succession.

I hope that helps.

 

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[Maxjohan]

If you want the boring, true, answer: The easiest businesses to sell are businesses with most of their value in real estate. Second on the list would be businesses in distribution that have a lot of other (non-RE) assets (I.e., hard inventory).

You're wrong about this. The easiest business to sell is the one who controls all water supply. Those who do this in a big city. Controls the people. They can charge big bucks for water. Because people has to shower. Otherwise they would be smelling like stinky old socks. I bet you didn't think about this!

Just joking. If you want to know something like this. Do your own re-search. By googling and re-searching.

Here is a list of some of, if not the biggest companies in the world:
http://www.forbes.com/global2000/list/#tab:overall

Would any of those want to buy your business? Do you create value?? Do your business make money?

If not. Nope. No Ferrari for you. lol.

Unless you can find a Sucker. lol. lol.