Now that we’ve discussed the differences between Strategic and Financial Buyers, it’s important to understand the five distinct lifecycle stages of a small business. The characteristics of each stage impacts how different types of potential buyers value your company, for better or worse.
The Start-Up Stage:
A small business in the Start-Up stage is highly dependent on the owner’s ability to turn his or her vision into a reality. For potential buyers, the business is an unknown quantity that’s difficult to value. As a result, buyers are rarely interested in start-ups. If your business is still in this stage, it’s better to plan your exit for at least three years from now. This is the time you’ll need to grow sales.
The Early Growth Stage:
At this stage, the business is experiencing an increase in sales and operating at a break-even rate or slightly better. Since the focus is on building market share, the Financial Buyer is rarely interested at this stage. Your business may be attractive to Strategic Buyers who want access to your market and/or need to add your products or services to their own.
The Sweet Spot – The Accelerated Development Stage:
A rapidly growing company is prime for acquisition by both Financial and Strategic Buyers. Both types of buyers look for at least one or more of the following conditions:
The business is experiencing a dramatic increase in sales or high profit margins.
Working capital and credit lines are on the verge of being maxed out and it requires an infusion of cash to maintain growth and increase market share.
The business is growing beyond the abilities of the current management and needs a more experienced team to take it to the next level.
In this stage, you can easily justify higher profit projections which in turn motivates buyers to pay a higher price. Unfortunately, many owners miss the boat to sell high. Years later, they find themselves vulnerable to external factors that greatly lower the value of their business (this will be discussed in a future blog post).
The Maturity Stage:
The Maturity Stage brings a leveling off of sales and erosion of profit margins. Competition is tougher. The business struggles to maintain a foothold in its market. Meanwhile, complacency among managers begins to set in. The upside – because the company is established in its market, and has a solid record of earnings in previous years, it can be attractive to the Strategic Buyer who can provide the capital and management the business needs to grow.
The Declining Stage:
During this stage the business is experiencing an erosion in sales, marginal profits, and intensive competition. It needs capital to turn things around and may also have a problem holding onto skilled personnel. A company at this stage can possibly be attractive to buyers known as Turn-Around Specialists but these types of buyers tend to be rare.
All in all, understanding these 5 stages of business will help you understand the types of buyers that might be looking at your business. Reading through you can see that each stage holds different characteristics that will determine how your business will be valued. Depending on what stage you are in will help you plan your exit strategy to get you the best return possible for your restoration business.