Business Transition - Through the Buyer's Eyes

By Tom Bixby, President & CEO, LEVEL Management Partners
Published April 21, 2016

The prior article in this Business Transition Series addressed planning your future beyond exit. In this article, we’ll explore business transition from the other side of the table and the value perceived through the eyes of the buyer.

Objectivity is Hard

Every business owner thinks their baby is the most beautiful, but their view is often emotional rather than factual. Would-be buyers look at the numbers, assets and potential for your business balanced by their investing time and capital toward desired returns. Bringing that buyer’s perspective into stark focus demands detached objectivity few buyers can affect without professional experience and expertise.

Highly successful Investment Banker and LEVEL Expert Network™ member Eric Togneri, Managing Partner at Neri Capital Partners says, “The time to start thinking about the value of your business through a buyer’s eyes is the day that you put together your first business plan. Effective value creation occurs when daily to long-term decisions reflect a concerted effort to be prepared when an exit occurs.”

What is Important to Buyers?

The first thing to consider is whether you are dealing with a strategic buyer or a financial buyer as their needs and expectations are different. Strategic buyers are often your competitors looking to expand into new geographic markets, add new or superior products, or enhance back office operations. They might also be your suppliers who find value in moving closer to the end customer, or your key customer who wants to control the supply of your products. In any case, they will look to add your company’s strengths to their own and eliminate weak or redundant elements from either organization after the acquisition is complete.

Financial buyers are looking for high-quality, predictable future earnings. They are simply investors and will want to find a well-managed business with stable business processes executed by talented employees who are motivated to stay and perform well in their roles under the new ownership. They will look for solid financial performance with legitimate growth trends and scalable operations to deliver that growth. Significant and persistent competitive advantages are also important factors influencing a financial buyer’s perception of value.

Anticipating a Strategic Buyer’s Needs

A dental practice located in the southeast found success growing patient volume through cost advantages gained through process efficiency. Further efficiencies were realized by optimizing patient flow, staffing and facilities, achieving industry-leading best practices and market-leading stature.

Intent on identifying the ideal strategic buyer capable of envisioning the scale potential, the owner enlisted an expert Investment Banker who helped assemble the prospectus. Together, the Investment Banker and business owner documented all financial and operational details necessary to replicate the flagship location’s success in markets nationwide, garnering a $20mm cash sale while retaining a 5% stake.

An entrepreneurial physician prescribed an antidote for the lack of convenient, affordable healthcare throughout midwestern small towns and rural communities. Small town private practice doctors were being replaced by corporate-owned urgent care centers. This physician's novel, replicable urgent care concept was built for maximum efficiency and scalability. Proven at his rural Indiana urgent care center, this model achieves 55% in net profit from $1.5M gross revenue.

With the guidance of an expert Investment Banker, the physician extended his urgent care model to include primary care, home care and managed care options as a way to attract attention from strategic buyers able to envision deploying this model nationwide. This approach ultimately uncovered the right buyer, with a structure where a 70% share was sold to a private equity firm intent on launching 20 urgent care clinics targeting $50M to $80M in revenue.

Preparing for Maximum Value

Overcoming the objectivity challenge is a key reason for connecting with professionals who bring the buyer’s eyes to bear by commonly interacting with private equity groups or other potential buyers of businesses similar to yours. They will use this insight to help define the attributes prospective buyers would value and any aspects of your business the buyer might be concerned about. If you don’t have people inside your firm with the skill, experience and free time available to organize and drive needed changes, secure outside help from experts who can help make your business attractive through the eyes of your intended buyer.

The next article in the series, “Business Transition – People and Taxes”, will take a look at the effect the sale will have on the people involved and the impact it will have on your taxes.

View Part 4 - Business Transition - People and Taxes

Fully develop your post-exit opportunities with a holistic exit strategy and plan incorporating LEVEL's Growth Vision and Value Architecture solutions.

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