Key things buyers look for when buying a business.

When it comes time to sell your business, a potential buyer will scrutinise your business from a number of different angles. This can include from a commercial, legal, tax, IT, environmental and financial perspective.

Here is a list of some of the key things buyers look for when buying a business

during due diligence:

Revenue: sales, top line, whatever you call it, revenue is at the top of every buyers list of due diligence items. They want to know everything and anything about it. From:

1. is it real and how they can get comfort on it being real?

2. is recurring and how consistently has it been recurring?

3. is it concentrated on one or two key customers/clients or industries where a little churn can wipe out thousands, or even millions, in sales.

The due diligence process focuses on the above items, and many others depending on the industry your business is in and how deep the buyer wants to dive into the numbers. Vendors can undertake Vendor Financial Due Diligence to independently analyse their revenue and be prepared for when the buyer undertakes their due diligence.

Quality of Earnings: normalised earnings, adjusted earnings, QofE. A fiercely discussed, disputed and analysed part of the financial due diligence process. Normalised earnings form part of the equation of the valuation of your business. Buyers seek to bring this number down as far as reasonably possible, to reflect the true go forward earnings the business will experience.

The due diligence process uncovers personal, non recurring or abnormal expenses as well as errors in revenue recognition or recognising expenses. Typically starting with reported EBITDA, some transactions look at EBITA or even EBIT, the Vendor seeks to remove the noise of the last three or so financial periods that are not normal. It is extremely important to the transaction process and can be a deal breaker if the normalised earnings don’t stack up.

Working Capital profile and target working capital: there is no textbook definition of Working Capital. It could be distilled down to current assets less current liabilities, however the buy and sell side have different opinions on what is considered working capital. As part of the due diligence the buy side would seek to normalise the working capital profile and determine a normal level which ideally is positive (i.e. assets > liabilities), where as the Vendor seeks to determine a normal level which ideally is close to nil.

A Target working capital or ‘peg’ is also fiercely contested and negotiated in share sale transactions. It is a protection mechanism for both the Buyer and Vendor. It ensures the Buyer doesn’t have to dip into their back pocket on day one of ownership to keep the business running. It also ensures the Vendor doesn’t run down inventory, collect debtors and stretch creditors before transaction close and leaving the Buyer in the dark.

Net Debt: share sales are typically cash free and debt free. The Equity Value to Enterprise Value bridge includes a $ for $ upward adjustment for cash (excluding any trapped cash) and cash like items and a $ for $ downward adjustment for debt and debt like items. These are determined during the financial due diligence process and can range from simple cash at bank balances and bank loans to income tax provisions, cash backed deferred revenue and ATO payment arrangements.

Don’t go through the sale process alone. Whether you are on the buy or sell side, a corporate advisor can assist you to navigate the nuances of a transaction and ensure you are progressing with your best foot forward.