A good business or a good investment.

AuthorBannon, Mel B.
PositionBUSINESS

Which do you have? Which should you have?

When the time comes to think about planning an exit from business, it is important to consider the differences between a "good business" and a "good investment." The next owner of your company will be looking for a good investment, not just a good business. If you want to attract a qualified buyer and get the highest value, you will need to turn your business into a "good investment."

Hallmarks of a Good Business

Most privately-held businesses are lifestyle businesses. In other words, the business generates enough revenue and profitability for an owner to live comfortably. Often times owners focus on the personal benefits of business ownership over the potential for the future of the business. For example, business owners will often be satisfied with slow or no growth in the business as a trade-off to not having to work as hard, not having to borrow money, and not dealing with excess complexity.

When a business owner has a good business, such as the lifestyle business described above, there will more often than not be a limited set of professional buyers for that business. In fact, the largest pool of potential buyers may be individuals who want to enjoy the same lifestyle as the owner. However, these owners of good businesses have a limited market of potential buyers. Professional buyers are not just looking for good businesses, they are also looking for good investments (which often drives a much higher purchase price).

Hallmarks of a Good Investment

There are many hallmarks of a good business that also translates into a good investment. The list below is by no means a complete accounting of all attributes of a sought after company, but it will provide an overview of areas that professional investors consider important when purchasing a privately-held business.

* A business that can run without the owner: Owner dependency is a major issue with professional buyers. If your company is highly dependent upon you in order to run and grow into the future, then buyers may not consider your company a good investment. If you think about your investments in public securities or mutual funds, those companies run without you. You are merely an investor in that company. In most small businesses the owner is intricately involved with many facets of the business. While some management may be in place, this is often not enough to reduce the high levels of owner dependency. Therefore, in order to make your company...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT