Why A Potential Buyer Won’t Buy Your Business, Part 3 of 3
Risk #6: Your business has a leak—cash is flowing out faster than coming in.
The next risk has a funny name for those of us who work with measuring and building business value — the Valuation Teeter Totter — but the implications can be quite serious. This risk is all about cash flow, and some owners confuse cash FLOW with bottom line profits.
The flow of cash in your business is about how fast cash goes out vs. how fast it comes in. You need to bring cash in faster than it’s going out—you need a positive cash flow. When it works in reverse, when it’s going out too fast, that’s a risk for buyers and it greatly impacts what a buyer might be willing to offer you for your business — if they still decide to proceed.
You see, the buyer has a pile of money they’re willing to spend to buy a business. That pile is used in two ways… to purchase the business from you AND to run the business after you exit. The more money they have to inject into running the business (the working capital), the less they have left to buy the business because it all comes from the same pocket. Does that make sense?
Risk #7 & #8: It’s too hard to generate revenue; every month you start from zero.
Not only will a potential buyer look at your cash flow and financial performance, but they’ll also consider how much effort it takes to generate revenue, bring in cash, and make sales. If every month your sales process and accounts start from zero, they’ll see that there is a fair amount of effort each month to meet your own sales and revenue goals.
I’m covering two risks here at the same time because they could be considered related risks. Specifically, the first is about your revenue model—how you generate income for your business—while the second is more about customers giving you money.
Looking at revenue, every business has monthly sales targets. On the first of the month, how close are you to reaching that goal? That is a question a potential buyer will be thinking even if they’re not asking it out loud.
An optimized business, one that works to reduce risk, is likely well on its way to meeting that monthly goal before the month even begins because they’ve implemented a business model that gives them a head start each month. If your business struggles to hit your monthly sales targets, that’s something that will put off a buyer and have them seeking alternative investments, perhaps by buying your competition.
The second risk here is about customers actually giving you money. Many businesses have a loyalty program where customers might earn “points” each time they purchase. This is usually an effort to entice customers back, using their points for a free promotional item, but I’m not talking about that here.
Some business owners run customer satisfaction surveys, and that’s a great start, but generally those surveys are not statistically sound models—the feedback they provide is anecdotal. These often include vanity metrics, such as — Facebook likes, Facebook friends and followers, or reviews, stars and thumbs-up ratings are—they might make you feel good and believe your customers love you, but those mean little to an buyer who’s investing their money in your business. Those kinds of metrics don’t bring in the money from customers.
There is a statistically proven model that does pique a buyer’s interest — Net Promoter Score. This score (-100% to +100%) provides a direct correlation to improved revenue and referrals. Implementing Net Promoter Scoring will help you show a potential buyer that your customers truly promote your business, thereby minimizing the risk they may encounter and encouraging them to buy.
More on how to get your Value Builder Score at the end of this post. Right now, let’s recap the main reasons, including the 8 risks I’ve shared, that influence buyers NOT to buy your business:
- You don’t understand who’s buying your business and why (they’re an investor, looking for a return on their investment).
- There is too much risk associated with your business, period.
- If it’s cheaper/easier for an investor to build it themselves and become your competition than it would be to buy your business, you’re in trouble.
- Your business relies on you. (try the exercises I’ve provided with RISK #1)
- You have problems with your financials. (get your books in order; get an external audit done)
- You have a narrow moat and it needs to be a wide moat. Don’t become commoditized or else you’ll find yourself competing on price and in a race to the bottom.
- You’ve already eaten the whole apple, which means there is nothing left for a new buyer to feast on. If they see no upside, then you’ll be hard-pressed to attract a top notch offer.
- Can your business effectively scale to meet growth potential? Buyers may be put off if your business lacks the internal systems, operations, and people to meet the growth potential expectations the buyer has. If not, it is likely the buyer will need to invest in those things or lose out on potential growth opportunities—and if they need to invest further to make your business growth ready, then that’s money that comes out of the offer they would have made you.
- The business hinges on a few key employees, customers, and/or vendors to successfully sell your products. The departure of any one of theses key elements creates operational risk within the business a buyer is not likely to take on.
- The business pipes are leaking cash. You have a negative cash flow, so money is leaving the business faster than it comes in. All the money a buyer has to purchase and operate the business once they’re in charge comes from the same pocket. If the handful to operate your business is too big, the offer they make to buy will be too small.
- Every month your sales and revenue targets start at zero. Vanity metrics may make you feel good now, but wouldn’t knowing you have created a secure financial future for you and your family make you feel much better?
The bottom line is, even if a buyer decides to take on all the risks and problems they’ve uncovered during their due diligence, they’ll offer you much less than what you asked for and expected.
Based on my experience, to help mitigate the risk, the buyer structures a deal that gives you only a portion of the purchase price upfront—just enough to make you feel happy, but not enough to make you feel secure). The rest is held back and the buyer establishes targets you must hit over a period of time before they release the next portion of the sales price—which may be several years later. And to help ensure those targets are met, the buyer requires you to stick around as their employee, running the business the way they think it should be run.
So much for a financially secure retirement! You have just become an employee of a bigger company, now likely a “corporate middle-manager.” But isn’t that why you became an entrepreneur—so you didn’t have to have a 9-to-5 corporate job? Congratulations!!!
If you’d like to take action on securing your business from the risks I’ve reviewed in this blog series, feel free to contact me directly, or you can begin by getting your SCORE.
Remember, you must put yourself in the shoes of potential buyers. What is it they are looking for and what might scare them away? How are you reducing the risk in your business to make it more attractive to a potential buyer?
Click the green Get Your Score button to complete the business value audit that my friends at the Value Builder System and I offer. There’s no obligation, no gimmicks — get your SCORE for FREE.