There are a number of factors which, if present, make a good case for a private buyer to be able to effect the purchase of an SME business. Some of these include:
- A business which has been for sale for over 6 months – these businesses have often, by this point, exhausted the idea of a trade or private equity sale and might be more likely to welcome an approach by a private buyer.
- A solid balance sheet, typically with over £250,000 net asset value – this will give funders some comfort around assets which can be leveraged in the context of providing funding for the business.
- A retirement sale – an owner who is approaching or over traditional retirement age is more likely to be realistic about price and structure of an offer to buy the business.
- A business where the owner might consider selling less than 100% of the equity
- Stable/growing profits, typically above £250,000 and below £1m per annum – businesses with profits lower than £250,000 per annum struggle to attract funding and ones above £1m profits tend to be attractive to private equity and so there is a lot more competition.
- Positive cash generation – some businesses generate more cash and therefore, there is potentially more cash available to repay the debts. This is particularly relevant for funders when considering how their loan will be repaid over time.
- Visibility of future growth for the prospective buyer – this could be new markets, products or different customer types. It could be that the company could start to trade overseas and open up new geographic territories. It might be something as simple as a new and better database might be required which could start to elicit more sales opportunities.
- An opportunity to introduce formal sales and marketing strategies in to the business – a business which has not had much in the way of investment in sales and marketing is a good target/prospect due to the potential results a concerted sales and marketing drive could produce for the business and therefore, by growing sales and corresponding profits, this can only add value in the long run. A lack of investment by the owner in sales and marketing is not uncommon to see. The reasons could include: (i) the company has had a bad recruitment experience in this area in the past and are naturally more sceptical about the success of this type of investment; (ii) owners don’t want the expenditure/hassle associated with running a sales team; (iii) the owners carry out the role of Sales Director and don’t wish to replace themselves; (iv) the owners don’t believe in outbound/proactive sales, preferring to operate with office based sales/order takers.
- Good and long standing second tier management team or at least someone in the team who can step up as General Manager/Manging Director in due course – if there is a good team or even one key individual (other than the owner) who can operate the business on a day to day basis, this means that the business is not reliant on the owner to keep it going. This makes it easier for the existing owner to exit the business and also for the new owner to be able to step in without causing too many ripples. This all helps with keeping things “business as usual”.
- A niche or defensible product or sector position – this refers to the barriers to entry which can stop new entrants coming into the market and threatening the company’s position. If the products or services take a long time in research and development or require a great deal of capital expenditure to create, this all helps to stop competitors entering the market. It might be that a niche sector or position has been developed over many years and would be very difficult for a new competitor to penetrate.
- Some form of intellectual property (IP) – a protected or patented product or service will make a huge difference to safeguarding a company’s position and will also add value into the future.
If many of the above are present, then there is a really good chance of a successful purchase taking place.
