To many investors the existence of patented products or technology is a key question in their evaluation of an opportunity. In some cases, a patent can be an important part of the transaction and a significant barrier to entry. However, the cost of obtaining a patent and the resources needed to defend it against infringement must be considered before deciding whether to seek a patent.
As buyers move forward with a purchase of a business they will request copies of financial statements prepared by the seller’s Certified Public Accounting firm. One of the first items they see on these statements is the name of the firm that prepared these statements, and ask their advisors what they know about the Seller’s CPA firm. As the size of the target company increases, buyers expect the CPA firm’s reputation will also increase. Is this a snob test? Partly, but not completely. There are two things to consider here. One is firm size and the other is industry knowledge.
Business owners are constantly weighing the need to upgrade equipment and technology. On the one hand, they want to be as efficient and cutting edge as possible, on the other hand constant upgrades may have a negative effect on profitability and can be disruptive to bring online.
A review of Inventory Turns is often an important part of a buyer’s analysis. Since many businesses have a significant amount of capital tied up in inventory, how fast, or how many times per year a business turns inventory can be as important as the gross margins the business achieves. If there is a significant difference between a subject company and their industry or businesses of similar size, the owner needs to be able to explain to buyers the reasons for this difference. The owner must demonstrate that their model is efficient, profitable and serves a purpose, thus should continue.
Perhaps no single topic is more complex than that of family members working within a business. Everyone has a story about a family business paralyzed by the family dynamics. While there are some successes, the general feeling among buyers is a fear of businesses with too many family members in key positions, especially: Sales, Customer Service, and Accounting. Each of these positions deals with the customer and money. These positions can be difficult to replace at the same time as a working owner.
Too much on one thing can be bad, such as too much revenue from one customer. This can also be true of too much concentration or reliance on one product or one industry. If a business sells a product and most of their customers are military related and there is a rumor or hint of a sequestration, or a change in military purchasing, buyers will be concerned and reflect this concern in their offer price.
Intellectual Property is one of the ways a company can stand out from its competition. Having legal protection for an idea, a symbol or a marketing phrase can add value to a transaction. Would you buy McDonald’s without the Golden Arches? Would you buy Nike if you could not use the swoosh? What about buying Subway without the right to use the phrase “Eat Fresh”?
What’s in it for me? From GE and HP to the local entrepreneur. Every buyer of every business asks: If I buy this business, take it over and run it well, what is in it for me? While there are often many answers to this question depending on the individual business, one area of chief concern among all businesses is profitability. For many closely held businesses certain expenses, which are discretionary or unnecessary, even if totally legal, can obscure true profitability.
"Brain drain" is the potential loss of institutional knowledge that occurs when the current owner and members of his team depart after the company is sold. Diversifying the institutional knowledge among a wider group of employees and memorializing processes and procedures is important to prevent brain drain, both the perception and the reality.
When your customers think of your business, what do they think of? It is your products; your service or a person at the company? When they buy from you, do they buy because you have better pricing, product breadth or because they like Mary their account rep?