Thinking About Selling Your Business? Here’s What a Buyer May See That You Don’t.

If you’re thinking about selling a business in Kansas or elsewhere, whether that’s next year or five years from now, it’s worth understanding what your business looks like from the other side of the table. You’ll want to consider your personal goals and timeline and be really honest with the broker regarding the state of your business.

I recently worked with a buyer who had been searching for a business to acquire for nearly two years. He reached out about an aerial application business I was representing in Kansas.

By the time we connected, he had already gone through due diligence on multiple businesses. Every one of those transactions had ultimately fallen apart.

His experience gave me an interesting look at what business buyers are seeing, and what business owners may not realize buyers are seeing.

“None of These Businesses Are Worth What They’re Asking”

One of his biggest frustrations was business valuation.

In his experience, he kept finding businesses for sale that looked attractive initially, but once he got deeper into the financials, he didn’t believe the asking price was justified.

This is an important distinction for owners preparing to sell a business.

The value of your business isn’t simply what you want to get for it. It has to make financial sense to a buyer.

Buyers are looking at earnings, assets, growth, operations and, importantly, risk. Kansas SBDC guidance similarly identifies ownership involvement, management strength, financial stability, recurring revenue and operating systems among the risk factors that can affect value. 

A buyer is ultimately asking: If I invest this amount of money into this business, is the potential return worth the risk I’m taking?

That question becomes increasingly important once the buyer begins due diligence.

What Happens When a Buyer Starts Asking Questions?

Another frustration this buyer consistently encountered was owners who couldn’t answer detailed questions about their businesses.

He might ask:

• What are your profit margins on this product or service?

• Which product categories are growing?

• What caused revenue to increase or decrease?

• How involved is the owner in generating revenue?

• What happens to the business when the owner leaves?

And sometimes, the owner simply didn’t know.

From the buyer’s perspective, that was alarming.

In fact, the word he used was dishonest.

But this is where my perspective as a business broker was different.

The Owner May Not Be Hiding Anything

After working with small business owners, I’ve found that an owner being unable to answer a question doesn’t necessarily mean they’re being deceptive.

Sometimes they simply haven’t been measuring it.

Many small business owners know their businesses incredibly well. They know their customers. They know their employees. They know what needs to happen every morning when they walk through the door.

But they may have never needed to calculate profitability by product category, document exactly how customers are acquired or quantify how dependent the business is on their personal involvement.

Then they decide to sell.

Suddenly, a buyer is asking questions they’ve never had to answer before.

And what feels completely innocent to the seller can look like a major red flag to the buyer.

That matters because due diligence is specifically when buyers dig into financial statements, operations, tax records, contracts and other information to determine whether the business is actually worth the investment and what risks they would inherit. 

There’s a Difference Between Owner Involvement and Owner Dependence

This particular buyer was also extremely concerned about businesses being dependent on their owners.

I’m not convinced that every business he described as “owner dependent” actually was.

There is an important difference between an owner who is involved in their business and a business that cannot function without its owner.

But perception matters during a business sale.

If a buyer can’t clearly understand what the owner does, what employees do, how decisions are made and what happens after the owner leaves, they may assume the worst.

And perceived risk can affect what a buyer is willing to pay — or whether they are willing to move forward at all.

Business Owners: Look at Your Business Like a Buyer

By the time I spoke with this buyer, several failed transactions had shaped the way he viewed businesses for sale.

From his perspective, businesses were overpriced. Owners couldn’t answer basic questions. Businesses were too dependent on their owners. And every new opportunity needed to be approached cautiously.

Those are broad generalizations.

But his perception is still valuable for business owners to understand.

If you plan to sell your business someday, don’t wait until you’ve found a buyer to start asking yourself the questions that buyer is going to ask.

Can you explain your financial performance?

Can you demonstrate where your profits actually come from?

Can someone understand how the business operates without you?

Can you identify the biggest risks in your business?

And, perhaps most importantly, can you support your asking price with the financial reality of the business?

Preparing a business for sale isn’t just about putting together tax returns when you’re ready to list. It’s about building a business that a buyer can understand, evaluate and feel confident acquiring.

At the end of the day, the deal has to make financial sense.

For the buyer and the seller.

Want to Know How Buyers Would Evaluate Your Business?

If you want to understand the key value drivers buyers are looking for, you can contact us to connect directly with someone on our team for guidance.

Or, if you’re ready to see how your business stacks up, you can purchase the Business Reality Report.

The report scores your business against industry benchmarks, provides an estimated valuation, and explains the factors driving that valuation.

You can then use the report with your broker as a marketing tool and overview to simplify due diligence, or as a roadmap for where to focus your time and effort to strengthen the business and maximize your exit multiple (aka the value of your business).