How to get an investment group to buy your business

By Malcolm Roach, Open Door Technology

You may be at a stage in life where you are considering selling your business as an exit strategy from either the professional services business or a product development company.  Many of the businesses we see around us were founded by entrepreneurs and many have grown to a substantial size and valuation.  This creates a number of interesting dynamics when viewed in the context of the movement of the baby boom generation through the demographics in North America.  Not only are individuals hoping to sell businesses for significant returns, there are increasingly fewer entrepreneurs coming up through the ranks and especially ones with the resources to purchase a well-established business.  The same phenomenon is also found in the agriculture industry and the result is that many businesses and farms are being acquired by larger corporations and run by professional managers.  What is important to realize is that individuals need to prepare their businesses to meet an investment group’s expectations of a well-run investment, because that is how they will value your business.

The following are three items that are critical to attracting the maximum valuation for your firm if you are selling out to an investment group.

1. Excellent processes are an absolute must

Many businesses appear to be well run because of micro-management from one or two principals in the firm.  The investment group will wonder what will happen if this person or persons leaves.  The answer is to have well-honed processes that make the owners redundant and something that can be handed over easily to a manager.

2. Invest in your people

You often hear the expression that people are your best assets.  Well trained and happy people will be attractive to the new owners.  Staff who spend their time scrambling and are always behind will have difficulty fitting into a new culture.

3. Develop replicable IP

Investment groups are interested in intellectual property that can be easily scaled up to grow the business and increase profits, whether you are talking about a software product or a replicable service process.  It is this point that has the greatest potential to drive up valuations based on cash flow or gross revenue.  With IP comes the opportunity to value your company based on gross revenue and not just cash flow.

Obviously there may be entrepreneurs willing to buy out your business but with many of them having their eye on their own exit strategy, many potential investors are increasingly looking for bargains to compliment their existing business, not buy large, proven organizations that will take significant effort to integrate.  It would be wise to consider the three principles above as a starting point that will help you position your business or a business unit as an attractive option for an investment group.