Business Operational Factors
18 Business Operational Factors
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1. Products and Services
Buyers will look carefully at the products and services mix of the company. The product or service most valuable to the business buyer may not be the biggest revenue generator of the company. For product companies, buyers want proprietary products that don’t have to be customized. The product is differentiated and can achieve scale. If the company customizes everything, it would be difficult or impossible to achieve scale. Similar concerns exist for distribution and service companies. Buyers want to see differentiation and avoid commoditized products and services.
2. Management Team
If the owners of the business are the management team, the business is likely to be unattractive to buyers. Buyers want to see that there is an experienced management team in place. It’s very attractive to buyers when the management team has a track record of success. When evaluating whether or not to purchase a company, one of the first things buyers will look at is the strength of the management team. For businesses that don’t have strong management outside of the owners, start here. You can add tremendous value by addressing this issue.
3. Sales Team
There are a number of similarities in this factor to the previous one; the management team. Buyers want to see a strong sales team with a record of generating new account growth. Think of a strong sales team as another cog in the wheel of demonstrating that the business is viable without the current owner. In too many businesses, customer relationships are too dependent on the owner’s involvement. A strong sales team demonstrates to the potential buyer that the company has an established system for driving new business and the system does not rely on the owner’s presence.
4. Sales and Marketing Literature
The company’s sales and marketing materials need to be attractive, informative, and up-to-date. It needs to be appropriate to the respective industry. The marketing material demands of a manufacturing company, distribution company, and service company are going to differ. Dated, incomplete, or cheap brochures are very unattractive to potential acquirers.
5. Customer Base
Buyers don’t like to see customer concentration; customers of the company that comprise more than 10% of the overall revenue. It’s always better to have diverse revenue streams from a customer standpoint. The customer mix is also of great interest to potential buyers. Are they consumers, retailers, large corporations, or mom and pop companies?
6. Customer Relationships
Close attention is going to be paid to whether customer relationships are dependent on the owner remaining with the company. That would be a negative for an acquirer. They will want to examine the quality of the relationships with customers and how long-standing they are. High customer turnover could be a potential red flag.
7. Vendor Concentration
Dependence on a single vendor or group of vendors is risky. Manufacturing companies, for instance, have raw input costs. Buyers want to see that the required inputs for production are easily available from a variety of sources at competitive prices. Even if price is not the major issue, relying on one vendor or group of vendors means a vendor’s problem is the company’s problem. If the vendor has an existential problem, it affects the company.
8. Product/Service Quality
It probably comes as no surprise that attractive companies deliver products and services that are perceived to be of high quality relative to their competitors. Sometimes being the low-cost alternative is attractive. Even then, attractive low-cost companies are the ones with the higher quality in their segment. An example that comes to mind in retailing is Target Stores. Target is known for quality at low prices.
9. Employees
The company should have a big enough pool of qualified and competitively priced labor. Company employees should have excellent training. If salaries and hourly pay are in line with comparable jobs in the geographic area, employees are going to be more motivated. It’s an attractive quality to a potential acquirer.
10. Employee Benefits
How do the company’s employee benefit programs compare with those offered by other firms in the industry? Potential acquirers prefer to see benefit programs that are at least in line with comparable firms. Even better would be that the benefit programs exceed competitors’. This factor plays a big role in hiring and keeping talent.
11. Union
If the company is organized, buyers are looking for a history of good relations with the union and no strikes. A buyer would usually prefer not to purchase a unionized company all things being equal. Good relations definitely matter if the company has an organized workforce. Other issues for organized workforces include how soon union contracts expire and pension plans.
12. Employee Relations
Experienced buyers are going to research the attitudes of the companies employees. They want to see that employees have positive attitudes and low turnover in the company. If there are poor relationships with management and employees or management and shareholders, it will give a buyer pause.
13. Facilities
This factor includes some actual aesthetic considerations. The physical appearance of the company’s land and buildings makes an important impression on buyers. Clean, well-maintained facilities make a positive statement about the business itself. There should be an efficiency to the layout. Room for expansion would be a plus. What are the remaining terms on the lease and what are the renewal options?
14. Computer Systems
Integration makes the difference here. Businesses often run computer and data processing systems that are either out of date or don’t talk to each other. A well-integrated, up to date system that is integrated throughout the company is very attractive. This is provided that it has the capacity to handle the company’s needs over the next several years. Buyers need to factor in the cost of upgrades if this is not the case.
15. Company Website
Believe it or not, there are still companies of significant size that don’t maintain a website. It’s becoming increasingly rare. What’s sadly not rare is poorly constructed websites that are irrelevant and unattractive. It depends on the industry. No matter what the industry, though, buyers will be impressed by an easy to navigate, up to date website that is a part of a fully developed internet strategy.
16. Fixed Assets
Similar to the company facilities, buyers are looking for well maintained fixed assets. If there are significant fixed assets as in a manufacturing plant, are the fixed assets up to date? Well maintained, up to date equipment with recent appraisals is very impressive to a prospective buyer.
17. Leases and Other Significant Contracts
Buyers are going to look carefully at the existing contracts. Questions they’re looking to answer include whether or not the leases are assignable and whether or not they would place restrictions on the new owners. It’s helpful to demonstrate that rents the company pays are in line with current local market rates.
18. Location
With the continuing rise of E-commerce, location vis a vis customers is less important for many businesses. Depending on who the company serves, location relative to customers may still be important. Location may still be important in terms of how convenient it is for vendors and transportation services. The cost of living may be a factor for the local workforce. If the cost of living is too high, it may be a problem to get enough skilled labor.
