Most Desirable Characteristics in the Business Marketplace

Most Desirable Characteristics in the Business Marketplace

Posted on September 10, 2018
“Why wouldn’t a buyer like my business?” is a question every broker has been confronted with on many occasions.  This makes a reader think the broker made a negative comment about the business.  Not so.  Every broker has fielded this question from defensive business owners.  It’s not that a buyer would or wouldn’t like the business.  It’s just that one specific issue, or two . . . or several issues will affect the value, or financing . . . or amount of interested parties.  How many things in this world are perfect?  Not many businesses are, either.  Some of the most desirable business traits are itemized below.  This list is universal amongst all businesses but far from complete.
 
Customer Concentration:   Ideally, a prospective buyer would love to find a business with an infinite amount of clientele for the business with the largest account less than 1% of sales.  Unfortunately, that is a very rare characteristic.  There is no magical number concerning customer concentration at which point buyers stray from the deal but all business buyers would love an infinite amount of accounts.  
 
Diversity:   Not having the entire clientele base centered in one industry is an attractive feature, however, apportioning supply lines, diversifying marketing efforts, banking relationships and maintaining a balance of inside labor as well as sourcing work to other suppliers is also the diversity buyers like to see.  
 
Repeat Sales:   This goes somewhat hand in hand with Customer Concentration.  Business buyers like the comfort of knowing clientele will keep making orders.  If repeat sales are unlikely the business is still saleable but at a lower premium than if there are repeat sales.  Repeat sales are something that is characterized by certain business types versus any given business.  
 
B2B vs B2C:   Indisputably, B2B is much more desirable to a greater number of buyers.  There is no shortage of buyers for strong B2C businesses but there are more buyers for B2B businesses.
 
Niche Businesses:   Niche businesses are not necessarily a commodity of a greater value but ‘niches’ have a certain charm that many business buyers like.  The only danger is if the niche of the business confines itself.  Of course, the business is not a niche business if there are several other businesses in direct competition with it.  
 
Seasonality:   There is no shortage of buyers for successful seasonal businesses, however, weak seasonal businesses are very difficult to sell.  Buyers know successful seasonal businesses frequently provide extended vacations for the owner.  The danger of a seasonal business is the marketing window for selling it is short.  The seller needs to ensure the buyer is serious and will get the transition closed.  In contrast, business buyers’ perceptions of a weak seasonal business is cash-flow can take a few seasons to increase to meet expectations.
 
Dependence on the Owner/Manager:   Businesses groomed to operate, grow and thrive without excessive, hands-on supervision are the best sellers.  This usually means the business is profitable with a GM or having well-trained, well-paid employees.  Businesses dependent on special skills such as an owner with a PhD in Astro-Physics, are still saleable, however, buyers will evaluate the business with a new manager’s salary to replace the seller’s special skills.  Businesses needing excessive attention from the owner still sell but buyers may evaluate that business by adding a manager or additional employee to the business.  
 
Consistent, Steady Growth:   Businesses having had steady increases in revenues and steady increases in profits are very strong sellers.  Just like a stock, the best indication of future performance is past performance.  
 
Competition and Volatility:   Numerous industries have unrelenting competition but many of those industries have unrelenting demands.  The food and beverage service industry is an example.  In areas where manufacturing is a predominant industry the competition for securing contracts doesn’t seem to concern the management as much as losing employees.  Each of these businesses are evaluated on their own merit.
 
Branding:   It is difficult for many small businesses to ‘brand’ their products, if a manufacturer, and not easy for distributors, either.  The branding would probably be in the form of marketing and/or customer service that sets them apart from competitors in the same geographical region.  
 
High Profit Margins:   It would seem buyers prefer businesses with extraordinary margins and they do.  However, some businesses buyers caution themselves if they could realize the same exceptional margins that the current owner achieves with themselves as the manager.  Frequently, larger scale businesses with tight margins are appealing to an even larger company in the same industry with the vision of being able to increase margins.  There is a great deal of discussion to margins and that what may not appeal to one buyer will appeal to others. 
  
The list of desirable traits for businesses is endless and varies with each business type, however, the above-mentioned traits are universal for all businesses in every industry and business model.  

Tom Stayanoff is a Senior Broker with Indiana Equity Brokers and specializes in serving small and medium-sized businesses in Northern Indiana.