What Buyers See When They Look at Your Business
Most business owners think about their business the way a parent thinks about a kid on picture day. Best angle, best behavior, best assumptions about the future. I don't blame them. Most owners have invested not only time, but also battle-tested risk, risk beyond almost anything else they've endured. Making sure payroll is met, balancing cash flow, personal guarantees. So yeah, there's a sense of pride.
Buyers don't care. Check that, they care enough to get a deal done, but buyers mainly care about their risk. If they're putting up equity and taking on leverage, they want as little risk as possible. They don't want to go bankrupt or watch their cash burn. That's why they all have virtually the same buy box.
A buyer does not see your business the way you do. A buyer only sees what's there, on the page, in the numbers, in the org chart. Understanding how they evaluate what's in front of them is one of the biggest adjustments a first-time seller has to make.
Filter 1: The Buy Box
Every buy box runs through the same filter. This is table stakes. Fail here and the conversation ends before it starts. If the buyer moves forward anyway, they de-risk through lower multiples and earnouts.
Can the business run without you for 90 days?
Does one or two clients account for an outsized share of revenue?
Are you exposed if a key supplier disappears tomorrow?
Do the books tell a clear, consistent story?
Is revenue recurring and predictable, or one-off and lumpy?
Passing this filter doesn't make your business valuable. It makes you eligible to have the real conversation. And this is where almost all the exit-planning advice you'll find stops. Clean the books. Diversify the customers. Reduce your involvement. Good advice, and also just the floor.
Filter 2: Post-Close, Is the Business Financially Viable?
Nearly every buyer I've met, ETA, independent sponsor, PE, strategic, financially models an acquisition. They want to understand a few main things: Is the business financeable, what's the buyer's rate of return, and how much cash will they have when they sell.
How profitable is the investment? Most buyers' IRR target = 25%.
How much total value an investment has created relative to its original cost. Also called cash-on-cash. Most buyers' MOIC target = 2.5x.
Net Operating Income divided by Debt Service. This is the main metric an underwriter uses to approve financing for an acquisition. Most conventional banks target = 1.25x.
Filter 3: What Sophisticated Buyers Want
Once a business clears filters #1 and #2, buyers start asking a different question entirely. Not "is this business stable," but "is this business worth more in my hands than in yours." That's where the premium lives.
If a seller wants a premium exit, the kind of exit only a financial or strategic buyer can pay for, they need to move to level three.
Do systems and processes run the business, or are you guessing at what drives it?
What stops a competitor from doing exactly what you do next week?
Does the business renew itself, or do you have to go earn it again every quarter?
Does the market already trust the name, or does every deal start from zero?
Do you have a process to hit revenue targets, or does growth depend on you personally?
This is really the difference between being an add-on and being a platform, and it changes everything about how a buyer prices you. I wrote a full breakdown of that distinction here: Is Your Business an Add-on or a Platform? And, Why It Matters.
Where This Leaves You
I may sound like a broken record, but business owners who want a premium exit have to own their numbers, and start early. It's a lot to carry, but if you don't know your numbers, the buyer, at least on paper, will understand your business better than you do. And that means reduced multiples and repriced deals.
Knowing where you actually stand today, before a buyer tells you, is the whole game.
Please contact me if you want to see where your own or your clients' businesses land on these filters.
As always, thanks for reading.
Brett
Fenwick Partners
fenwickpartners.co
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