Wyoming Business Tips for May 3

A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.

By Leonard Holler, WSBDC regional director

“Why do some businesses have buyers lined up willing to pay top dollar, while others sit on the market for months or years? What do buyers look for in a prospective business acquisition?” Dave, Wheatland

The things that buyers want must exist in the business before the sales process begins, and it is your job as the owner to create value in your business before the sale. Put yourself in buyers’ shoes, and see what they would look for in a potential business to purchase and why they would be willing to pay.

Value drivers play an important role to the overall sale of a business. Here are a few key value drivers that are important for most potential buyers, based, in part, on an article by Kevin Short of Clayton Capital Partners:

-- Good management team. You need to establish a good team of motivated key employees. Buyers know that if a solid management team is in place, chances are good for continued business success. If a strong management team doesn’t exist, and the only key employee is the owner, it will be difficult to sell your business to a third party.

-- Operating systems. These systems may include computerized and manual procedures that are used in the business to generate revenue and control expenses. They also include methods used to attract customers and how your goods or services are delivered. Establish and document these standard business procedures or systems to demonstrate to a buyer that the business can be maintained profitably after the sale.

-- Diversified customer base. Buyers look for a customer base in which no single client accounts for a significant percentage of sales. In some instances, more than 10 percent of total sales to one customer may be significant. A diversified customer base helps protect a company from the loss of any single customer. If you find the majority of your sales are to only one or two good customers, it will be important to invest your efforts into developing a broader customer base.

-- Realistic growth strategy. Buyers pay higher prices for companies that have a strategy for growth. If you expect a higher price for your business, you need a written plan describing future growth potential and how that growth will be achieved. How will industry dynamics, increased demand for your company’s products or services, new product lines, marketing plans and expansion of capacity impact the company’s growth? A detailed growth plan will attract buyers.

-- Effective financial controls. Financial controls are a critical element of business management and also safeguard your company’s assets. More importantly, effective financial controls support a claim that a company is profitable. The best way to document that the company has effective financial controls, and that its historical financial statements are correct, is through properly prepared and perhaps reviewed financial statements by an established CPA firm.

-- Improving cash flow. Most of these value drivers can contribute to stable and predictable cash flow, but it is important that cash flow be on an upswing. You can increase cash flow, in most cases, by simply focusing on ways to operate your business more efficiently, by increasing productivity and decreasing costs.

By thinking about what you need to do to make your business more valuable, you can put these value drivers in place to increase the value of your business and position yourself to get a premium price for your business when you exit.

A blog version of this article and an opportunity to post comments are available at http://wyen.biz/blog1/.

The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email wsbdc@uwyo.edu, or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.