Start With Maintainable Earnings
In an owner-operated business, one of the first things a buyer wants to understand is what the business genuinely earns.
Reported profit does not always tell the whole story. There may be personal expenses, one-off costs, owner wages or other adjustments that need to be understood before a buyer can form a view of the maintainable earnings available to them.
For many of the businesses I work with, the owner remains actively involved and the adjusted earnings may sit somewhere up to around $200,000 or $300,000 a year.
At this level, the buyer is generally not looking for a passive investment. They expect to become actively involved in the business and take over at least part of the current owner's role.
That makes the quality and transferability of those earnings particularly important.
Buying Yourself a Job Is Not a Bad Thing
People sometimes describe buying an owner-operated business as "buying yourself a job" as though that is automatically a negative.
I don't see it that way.
For many buyers, that is exactly what they are looking for.
They want to be in charge of their own future. They want control over the decisions they make, the people they work with and the direction of the business. They may be replacing an employment income with business ownership, but they are also gaining the opportunity to build an asset and create a lifestyle around something they control.
The buyer may intend to work in the business every day. They may become responsible for sales, staff, customers or the overall direction of the operation.
The important question is not whether the buyer will need to work in the business.
The important question is how easy it will be for them to step into the owner's role and continue producing the earnings they are buying.
An Owner-Operated Business Is Different From M&A
This is an important distinction when thinking about small business value.
In a larger M&A transaction, the buyer will generally expect the business to operate through management. They are often acquiring the company from above and do not intend to replace the departing shareholder in the day-to-day operation.
An owner-operated business is different.
The incoming buyer may specifically intend to replace the seller. They do not necessarily need layers of management underneath them.
What they do want is a good team around them, a business they can understand and a clear pathway for taking over the role successfully.
That is why the objective before a small business sale is not always to remove the owner completely. It is to make what the owner does transferable.
Good Staff Can Have a Major Impact on Buyer Confidence
One of the strongest things an owner-operated business can have is a good-quality team.
A buyer may be taking over the owner's role, but they generally do not want to discover that every other part of the business also depends on the seller.
Experienced staff provide continuity.
They understand the customers, systems and daily operation. They know how work gets done and can help the incoming owner understand the business while they find their feet.
From a buyer's perspective, there is a significant difference between stepping into an established business with capable people around them and stepping into a business where all knowledge and responsibility leaves with the seller.
You do not necessarily need a sophisticated management structure. But you do want staff who understand their roles, take responsibility and can continue performing through a change of ownership.
Can the Owner's Knowledge Actually Be Handed Over?
In many successful small businesses, a great deal of knowledge sits with the owner.
That is understandable. They may have spent 10, 20 or 30 years building the business.
They know how to quote jobs, deal with suppliers, manage difficult customers, solve problems and make decisions because they have been doing it for years.
The problem arises when none of that knowledge can easily be transferred to somebody else.
Buyers want to know that there is a sensible way to learn the business.
Good processes and procedures help, but that does not mean creating hundreds of pages of manuals simply because the business is going to market.
It means that the important parts of the operation are understood. Staff know what they are doing. Key information can be found. Supplier and customer arrangements are clear. And the seller can explain their own role in a way that somebody else can realistically take over.
What Happens to the Customers When the Owner Leaves?
Customer relationships are another important part of buyer expectations.
Ideally, customers have a relationship with the business itself rather than relying completely on the owner.
If the staff already deal with customers regularly and the business has been run well, a change of ownership may not concern customers very much.
But in many owner-operated businesses, customers know the owner by name.
They may have dealt with that person for years. They may call them directly or rely on their advice.
That does not mean the goodwill has no value. It simply means the transition needs to be managed properly.
The incoming owner should be introduced. Customers should understand that the existing owner is supporting the transition and that the business, staff and service they rely on are continuing.
A sensible handover period can provide enormous reassurance to both the buyer and the customers.
A Good Handover Protects the Business Sale
I think sellers sometimes underestimate how important the handover process can be.
The buyer has just committed a significant amount of money to acquiring the business. Even an experienced buyer will want some confidence that the seller is not going to disappear immediately after settlement.
The exact handover will depend on the business.
It may involve introducing major customers and suppliers, explaining operating procedures, working alongside the buyer for an agreed period or simply being available when questions arise.
The objective is not for the old owner to remain indefinitely.
The objective is to provide enough support for the new owner to establish themselves without creating unnecessary disruption to the business.
The Right Buyer Can Matter as Much as the Number
Because the incoming buyer is often stepping directly into the owner's role, smaller business sales can also be about finding the right match.
A person can have the financial capacity to buy a business but still not necessarily be the right person to operate it.
They need to understand what the role involves.
The seller needs to believe that the buyer can take over the relationships and responsibilities they are leaving behind. Staff and customers also need confidence in the incoming owner.
This becomes particularly important where the owner has been the public face of the business.
A good transition is not about finding somebody who is exactly like the current owner. It is about finding somebody capable of taking control of the business, working with the existing team and carrying the goodwill forward.
Buyer Expectations Ultimately Influence Small Business Value
When we talk about small business value, it can be tempting to reduce the discussion to profit and a multiple.
Those things are important, but a buyer is looking at the complete picture.
They are considering:
- the maintainable earnings available to them;
- the role they will need to perform;
- the quality and stability of the staff;
- how dependent the business is on the current owner;
- whether customer relationships can be transferred;
- how easily the owner's knowledge can be handed over;
- the systems and procedures already in place; and
- how confident they feel about taking control after settlement.
Two businesses with similar earnings can therefore attract very different buyer reactions.
A business where the buyer can clearly see themselves stepping into the role, working with a capable team and continuing to serve an established customer base will generally present differently from one where the entire operation revolves around the seller.
Prepare the Business for the Person Who Will Buy It
If you are thinking about a business sale, one of the most useful things you can do is look at the business from the perspective of the person who may eventually buy it.
Ask yourself what that person would need to learn.
Who would help them?
Which customers would need an introduction?
What information currently exists only in your head?
And if you stopped coming to work tomorrow, which parts of the business would struggle?
You do not need to turn an owner-operated business into a fully managed M&A company.
But making the owner's role easier to transfer, building a capable team and reducing unnecessary reliance on one person can make the business considerably easier for a buyer to understand and take over.
Ultimately, what your business is worth to a buyer is not only about what it has earned for you. It is also about how confident that buyer is that those earnings, customers and goodwill will continue after they take ownership.
What’s Next?
If you are considering selling an owner-operated business, Wood Associates can help you understand how buyers are likely to view the earnings, staff, owner involvement, customer relationships and overall transferability of the business before it goes to market.
Our Business Sales team can assist with preparing and positioning the business, identifying and qualifying suitable buyers, managing enquiries and negotiations, and guiding the sale through to settlement.