Selling a small business in Australia is easier than you may think. This comprehensive article will explore what business buyers look for in an Australian small business.
To put it in perspective, launching and setting up a new business from scratch is more complex than buying an existing business.
Business buyers do proper research before purchasing any small business in Australia. Most business professionals sell their businesses due to retirement, health challenges, or other personal circumstances.
On the other hand, business buyers buy a small business due to its established infrastructure and ongoing cash flow.
It is a fact that buyers want to maximize their investment and lower their risk. As a result, in a business, they look at key attributes that help them assess the risk within the company.
Remember, you can only sell a business if there is a proper buyer. Hence, for that purpose, you must focus on key things buyers seek in a small business.
When preparing to sell your business, it is good to consider things from a buyer’s point of view. Buyers need to complete their due diligence so that they can make an informed decision on whether your business is suitable to purchase or not.
We will explore some essential concepts of what business buyers look for in a small business in this article.
Let’s begin by identifying who is a business buyer, their types, etc.
So, let’s get started…
Who Is A Business Buyer?
A business buyer engages in the purchase of a part or the entire business organization. They can be an individual, a group of individuals, your competitor, or a company in your industry or related industry.
These business buyers have unique characteristics, desires, and financial capabilities.
Business buyers are the backbone of any business organization’s success during the business sales process. Thus, with good business buyers and customers, it is easier to achieve organizational success.
To better understand the business buyers, we should understand their strategies and, accordingly, their behaviours.
Types Of Business Buyers
When you sell your business, it is important to remember what type of buyers are acquiring your company. Almost all business buyers have varying needs and goals.
According to the industry reports by BizBuySell, small businesses are the most widely sought-after entities in the business sale market.
As a business professional, when you start selling your business, you will receive offers from different buyers. Below are business buyers categorized into three different types of personas.
1. Individual Buyers
The sole entrepreneurs who are looking to run their businesses are individual buyers. They acquire business as a means of their livelihood to expand their investment portfolios. Moreover, they generally target profitable smaller owner-operated or family-owned companies.
Don’t be mistaken that individual buyers are naïve or have no experience. Most of them are branching out into first-time business ownership. Some own multiple businesses. They can do that because they have years of management experience in the corporate world.
Business activities are another essential thing that is bound to catch the eye of such a buyer. These buyers favour those businesses that mostly align with their interests. In addition, these businesses must offer products and services within their area of specialization, so they can add value.
2. Strategic Buyers
Strategic buyers are corporations that are seeking to acquire an existing company. The primary purpose of these buyers is to expand their operations. Moreover, they do this to unlock the value from a long-term perspective and to achieve usefulness and efficiency.
Furthermore, strategic buyers to expand their overall scope of reach acquire a business. They also acquire experienced employees, obtain a larger customer base, and eliminate a competitor. As these buyers have ambitious long-term objectives, it is sometimes better to sell to them as they may be willing to pay more. But, this is not always the case!
Different from individual non-sophisticated buyers, strategic buyers are not your first-time entrepreneurs. Instead, they are well-seasoned veterans who own established businesses. However, to grow further, they hit the market to find those entities that operate in the same industry.
3. Financial Buyers
Financial buyers buy small and mid-size businesses. They consist of private equity groups (PEG) or institutional investors.
There are two primary goals of financial buyers. The first one is generating a high return. The second is developing an exit plan.
While in charge, the financial buyer primarily focuses on revenue growth and cost-cutting. Thus, in this way, they can quickly increase profitability.
Financial buyers mainly exist as those companies prioritising return on investment (ROI).
The entity types that fall under this category include the following.
- High-net-worth individuals
- Private equity firms
- Venture capital firms
- Hedge funds
Now let’s turn into small businesses in Australia. What are they?
What Is A Small Business In Australia?
Small business has a significant impact on Australia’s economy. It includes its overall contribution to GDP and employment rate. Considering the strong influence of small companies, it is good to define the term clearly.
Let’s define the small business now…
Definitions Of Small Business In Australia
There are three key definitions of small business in Australia, based on the government institute which defines it.
1. Australian Bureau of Statistics (ABS) Definition
A business that employs less than 20 people is small in Australia, according to the Australian Bureau of Statistics (ABS).
Some of its additional sub-categories include the following:
- The first one is the non-employing businesses.
They include sole proprietorship and partnerships without employees.
- The other category is micro businesses.
These include employees between 1 and 4 people. However, non-employing businesses also come in this category.
- Some other small businesses employ somewhere between 5 to 19 employees.
In contrast, according to ABS, the medium and large businesses are defined as below.
- A medium business
has employees between 20 and 199 persons.
- And a large business
includes 200 or more people.
Small businesses have independent ownership. Owners or managers undertake principal decision-making and have close control of operations. Moreover, they contribute to most of the operating capital.
2. Australian Tax Office (ATO’s) Definition
For receiving tax concessions, the Australian Tax Office (ATO) defines a small business with an annual turnover of less than $10 million (excluding GST).
Most importantly, this amount was $2 million in annual turnover for the financial years before 2016-2017, but being adjusted based on the consumer price index (CPI) and inflation.
3. Australian Securities And Investment Commission (ASIC) Definition
The Australian Securities and Investment Commission (ASIC) defines that all small proprietary companies include some criteria. Thus, the companies need to meet either two or three of the below-mentioned characteristics to be defined as a ‘small business’.
- The annual turnover must be less than $25 million.
- Some other characteristics include that at the end of the financial year, 50 employees must be there.
- Finally, the value of consolidated gross assets is less than $12.5 million. It should also be at the end of the financial year.
What Makes Your Small Business Saleable?
Your business is unique, and it is your most important business asset. The saleability of a business requires a unique, objective assessment. Ignoring this step will be dangerous in the realization of the real value of your small business.
In simple terms, buyers are the one who determines the saleability of any business. It is sellable if the buyers have excellent reasons to purchase your business. Selling any business is like selling a house, so you must be prepared enough.
Three essential things will make your business looks good to a prospective buyer.
1. Healthy Profits
The first and foremost thing is the profits. Your business must have a good history of healthy gains.
2. Robust Systems
The second thing that the buyers will look at is the systems you have in place. The accounting, stock control, and other business systems must be current and functional. They must be efficient, modern, and transferable effectively enough to new owners.
The third thing is positive cash flow. Positive cash flow enables a company to grow further without needing more capital. On the contrary, negative cash flow requires the business to have more funds to be successful.
Therefore, it is a fact that a positive cash flow business is more attractive to buyers.
What Business Buyers Look For In An Australian Small Business Before Buying?
Buying an existing business is much easier as the established brand will profit immediately. Apart from that, it can also be less risky than starting from scratch. However, before you begin the journey of purchasing any business, there are many things that you need to consider.
Below are some things to look for.
1. Perform Due Diligence
Before you buy any business, it is good to perform due diligence. You must have as much information about the prospective company during the due diligence process. Thus, it helps you in making an informed decision.
The areas where you can perform due diligence include the below.
- The reputation of the business
- Industry-specific research
- Negative news
- Anti-money laundering protection
- Know your customer
- And business license, etc.
2. Current Market Situation
After due diligence, the subsequent most essential thing buyers will see is your current market situation.
First, they will see that your business has a consistent customer base. The second thing that the buyers will see is your competition.
The profitability of your business must be concrete with proper documentation.
For instance, in seasonality, organizing your annual income can give sellers an overview of typical profitability against industry trends. Moreover, buyers are also interested in your Tax Returns.
4. Growth Potential
A realistic growth plan will convince buyers that they will make significant profits as they want to expand markets, so they are concerned with your business growth potential before buying.
5. Competitive Advantage
It is essential to understand your business. Similarly, see how it works, considering its competitors in the market. The more protected your position as a business entity, the more price you can expect.
6. Diversified Customer Base
Mitigating risk factors of diversification is fundamental. Mostly, buyers prefer those companies where no client contributes more than 10% of total sales.
If the business relies heavily on a single customer, it becomes more vulnerable to drastic revenue swings.
7. Scalable Operations
Strategic and financial buyers always want expansion and growth. The business operations must be present in the market with less hassle.
A successful business considers the following factor.
More effortless scalability = Better sales price
8. Strong Management Team
It is essential for buyers that the company has a solid and experienced management team. They must have the motivation incentives to grow the company.
9. Intellectual Property
Evaluation of intellectual property is necessary and needs to be protected. The ownership of the brand name and any other patents or trademarks must be present in the deal.
10. Efficient Processes
Companies with information systems and efficient processes have better data for decision-making purposes. These standardized systems reduce the business’s reliance on its owner. Hence, this thing attracts buyers.
11. Good Reputation
In any business, a good reputation is everything. Try to perform searches and reviews about the company online and figure out any red flags about the company.
12. Cost Reduction Opportunities
Buyers always want to look for cost-reduction opportunities. They want operating expenses minimized, and profit opportunities maximized.
13. Clean Accounts
Your financial statements should look pristine whenever you are ready to sell your business as a seller. Likewise, the buyers will expect that all legislative obligations are present. The more proactive your approach is to show your business as clean, the easier it is to sell.
14. Proper Plan
All buyers will look for a business that can demonstrate its current results with a proper plan for the future. You can sell your business anytime, but you will achieve your best exit when you sell a money-making machine.
15. Barriers To Entry
It would be best if you positioned your business appropriately so that it becomes difficult for competitors to enter your space. Similarly, it becomes hard for them to take away your market share, where there is ‘protection’ like patents, copyrights, proprietary technology, etc.
16. Leading Market Position
It is gold for a buyer with a leading market position in your industry. Additionally, you can command a nice valuation premium as the buyer to gain additional market share. In short, it can leverage your dominant role in your industry.
17. Strong Recurring Revenue
All buyers want strong cash flow and increasing top-line revenues. If your company has substantial recurring revenue, it helps drive the price even higher.
On the contrary, if your revenue is inconsistent, that will push the valuation down.
18. High-Quality Financials
Buyers want to see your company audited or reviewed financial records. They do this to have trust in the quality of your earnings. Therefore, high-quality financials is a critical factor that will increase buyer confidence if your financial data is reliable.
19. Confirm The Business Entity Status
If the company you purchase is a limited liability company, corporate trust, sole trader, partnership or corporation, you must review its entity documents. Moreover, check its records and verify with the state that the firm has a good reputation. In addition, the owner must have the legal rights to sell it. Remember, there are scams everywhere to steal money.
20. Legal Liabilities
Before buying any business, you must check that the firm should not be in litigation. Thus, if you believe that the company has any legal liabilities, you will also be the party attending the lawsuit. That can be costly!
Research any legal liabilities you inherit, like liens or judgments against the company, etc.
21. Checking Zoning And Environmental Regulations
Check zoning regulations if the business comes with the property and see what activity is allowed.
Consider whether the operating company faces potential environmental liability when buying a property. Hence, it includes any hazardous material contamination, lack of applicable licenses, enforcement deficiencies, and permit violations.
How To Improve the Saleability Of Your Small Business?
Most types of business selling will occur in 2, 3, 5, or within 30 years. Therefore, business saleability is an essential factor to consider.
The best thing about business saleability is that it will maximize the number of potential buyers, and the ultimate amount you can sell the business for.
These buyers are the ones who take an interest in your business, once the transaction complete.
Below are some strategies to improve the saleability of your small business.
- Your business profile must be decent, and everyone is talking about your company.
- Investors will always buy something that can scale and have a fast growth potential.
- You must keep good accounting records.
- Buyers will always go for a business that has a unique value proposition.
- Always try to be realistic about your business.
- In today’s digital world, online reputation is significant for your business. Thus, you need to freshen up your website.
Your website must be engaging and visually appealing.
- A buyer will feel more comfortable purchasing from a company with a proven sales and marketing process.
- Streamline your operations so they are less likely to have cash flow problems. Your business must have inventory management and controls in place.
Selling a small business in Australia in a competitive market can be stressful for business owners. It is because the buyers can quickly investigate other companies and investment opportunities. The best strategy to apply is that your business must have all the key attributes.
A business must have low risk with a good ROI. In addition, it gives the future owners an increased sense of financial security, etc. A sale-ready business means understanding what value buyers need and ensuring you deliver the same.
When you’re getting ready to sell, try to keep the buyer’s point of view in mind.
In short, keep asking yourself – If I am a buyer, what would I be looking for, if I were considering buying this business?