Business Insights

In perspective


Seven key points an investor looks for in a business. Second part

September 02, 2016

A family business has great sentimental value for its founders and heirs, but once the decision to sell is made, it becomes very hard to value it in an objective way, since its price is set by cold, hard facts.

 

On one side, there are the contracts, the licenses, the customers, and the equipment; on the other, the business model, the brand and the patents. Plus, you have to weigh up the industry’s growth perspectives.

 

In the end, the true value of the company will be set by how much money it can generate, all elements considered, and not by how much each element costs individually. 

 

There are two basic reasons why investors want to acquire a company:

 

  • It has a great growth potential, even if it doesn’t have available investment capital.
  • Its assets’ price is below its real value.

 

With the help of the bridge fund investors, a family business can be restructured to become attractive for the former reason.

 

In the previous article, we mentioned the factors that have to be taken into account to reach a successful sale. This is a detailed explanation of the first three.


Clear value proposition

 

The way you present the optimal performance and growth opportunities of an enterprise will make those interested in buying to focus their attention on the differentiators and competitive advantages they would get.

 

It does not have to be the best business in the industry, but it is important to emphasize the elements that make it different.

 

In order to create a value proposition, the owners must ask themselves how their company and its products or services solve the problems or needs of their customers, and why are they choosing them instead of the competitors’ offers.

 

That differentiating value is what matters most.


Market

 

Besides the company’s performance, there are outside factors that must be taken in consideration during the transaction.

 

Among them, there is the current demand for the company’s goods or services, the number of its competitors, and if the industry is growing or shrinking.

 

The analysis of these factors plays an important role in the prospective buyers’ decision.

 

To reach a good deal, it’s important that the business has had profits for at least two or three years, even if they were low.

 

The best moment to sell a company is not when it’s about to go bankrupt, but when its growth perspective is favorable.


Liquidity

 

A business must have financial stability and prove that it can even take on risks.

 

Liquidity is one of the most important financial aspects to consider and it refers to the company’s ability to face its short-term obligations.

 

The amount of money a company has in hand, or that it can generate quickly, reveals how healthy the company is from the financial standpoint.

 

Having enough available cash means that the business can cover its liabilities on time.

 

To most of the potential buyers, the decisive factor in making a business acquisition is its capacity to generate resources, but only considering the last year’s results, is not enough.

 

The prospective buyers will evaluate the financial behavior of the business over the years to get a clear image of how it has been evolving.

 

They will also evaluate the current financial status of the company; its equity balance, its need for financing or investment, and its cash flow, and with these facts they will establish its profitability.


In the next article, we’ll talk about the remaining four factors that could need to be optimized to increase the success chances in a negotiation: management, financial profitability, investment scheme, and the exit strategy.