Business Insights

In perspective


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

September 15, 2016

When the decision to sell a family business is made, emotional factors come into play beyond the viability of the business, the perception of lack of time, or the means to make it grow.

 

There are plenty of stories behind its creation and development, which is why there could be a perception of failure in the seller, but it shouldn’t be like that. If a company has a chance to be sold, it’s because of its potential to earn income.

 

Selling the family business is, simply, another business option that can become very profitable to the founder, and to the next generations that would prefer to prioritize other projects.

 

In the last article, the first three of seven factors of a successful family business sale were explained: Clear value proposition, market, and liquidity.

 

These factors show the business has a good performance and several competitive advantages, growth opportunities, the financial stability to face its obligations and liabilities, and take on risks.

 

Next, we will analyze the remaining four factors that must be considered to perform a successful sale: Management, Financial Profitability, Investment Scheme, and Clear Transactional Exit.


Management

 

Whoever is thinking about selling their company must first develop and optimize the documentation of all relevant information.

 

This will allow the potential buyers to understand and manage the business and every strategy it has developed.

 

Prospective buyers will want to know about these specific aspects of the business management:

 

Direction: how specific objectives are defined.

Organization: communication and coordination procedures, how responsibilities are assigned, how the activities are determined, etc.

Resource allocation: important to compare results with the used channels.

Control: which mechanisms were stablished to prevent or regulate any malfunctioning.

Planning: strategy-making, process design, and the development of new products or services.

Execution: implementation of production, merchandising, distribution, and collection plans.


Financial Profitability

 

The interested parties will also need to know what the profits are going to be at the end of a financial period.

 

To evaluate the convenience of an acquisition, both profitability and liquidity have to be analyzed, that’s why several income statements and balance sheets are reviewed.

 

That gives them enough elements to determine the efficiency of the business operations.


Investment Scheme

 

For a prospective buyer, it’s important to know how does the company gets the required financial resources for its operations and for paying the expenses they generate.

 

It’s necessary to inform which have been the funding sources: their own (equity or loans), external, or the proportion of each one.


Clear Exit Strategy

 

Planning the exit is determining, and it involves both the business structure and the future of the employees.

 

Owners must rely on the knowledge of experts in business evaluation to ensure that they have an exhaustive panorama of all possible options to make the company attractive to prospective buyers.

 

Many businessmen believe that if they deal with the transaction on their own, they’ll “save” money on commissions and get more profit from the sale.

 

However, the opposite happens. By letting an expert optimize the business before selling it, the value will rise, and at the end they’ll get more money.