5 Ways to Differentiate When Selling Your SME Business in a Competitive Market
There has been a massive uptick in buy/sell activity in recent years within the small and medium-sized enterprises (SMEs) sector. This is great for market activity and the economy, but how does this affect you as the SME business owner that wants to sell your business in the near future.
How competitive is the SME buy/sell market?
A 2021 study conducted by the Business Development Bank of Canada (BDC) reports that over the next five years, 9% of Canadian small and medium-sized enterprises (SMEs) are expected to come up for sale externally, meaning outside the family or management, representing nearly 116,000 businesses.
The BDC report also shows that 13% of Canadian entrepreneurs plan to grow through acquisition, representing nearly 170,000 SMEs. These findings indicate that the SME buy/sell market is poised to thrive with activity from both buyers and sellers in the years to come.
The Office of Advocacy, an independent office within the U.S. Small Business Administration (SBA), reports on their website that there are 32.5 million SMEs in the US, so if we apply the same statistics to this market, the scale is far greater. The potential of the SME buy/sell market in the US could then equate to:
· 2.9 million SMEs that plan to sell in the next 5 years
· 4.2 million entrepreneurs that plan to grow through acquisition
These numbers suggest a massively overcrowded and competitive marketplace for sellers. It is therefore essential that your business stands out in the crowd through differentiation, or you risk being lost in a sea of sameness.
What are the motivating factors for buyers?
Pierre Cléroux, a Chief Economist from BDC says “entrepreneurs who choose to grow through acquisition are twice as likely to experience sales growth above their industry average than those who grow organically”.
Revenue growth is a common motivator for most buyers and some others include:
· Reduced operating costs and increased profitability
· Talent acquisition without the challenges of recruitment
· Technology adoption and advancements in business models
· Strategic positioning in new geographic, demographic and/or psychographic markets
Understanding these motivators can help you to position your business as an attractive option.
How does your SME business stand out in a crowded buy/sell market?
Looking at your business from a buyer’s perspective, helps you to appreciate what makes it attractive to a buyer. Finding points of differentiation to stand out in the crowd is crucial and is especially true if your business model is common to many in your market.
Here are 5 ways to differentiate internally, give buyers greater confidence in your future performance and set you up as a preferred option for acquisition.
1. Get ready for a change in ownership
If you think in terms of a relay race, the more effective you are at passing on the baton, the faster the next person can set off at full pace. Selling your business is the end of your current race, however for the new owner, it is the start of an exciting and hopeful journey. They will want to start strong, create forward momentum and achieve early wins to validate they have made the right decision.
Buyers desire businesses that are ready for a change in ownership and can continue operating effectively without impacting current revenues and profits. Getting ready for a change in ownership requires:
- Properly documented procedures and processes to ensure the incoming leadership has an operational ‘how to’ guide to keep things running smoothly
- Administrator credentials and licensing agreements for all software tools and social media profiles
- Employee, supplier, and customer contracts stored in a central document repository
- Accurate, updated and readily available financials representative of your business value
2. Reduce reliance on you the owner
Businesses with the owner at the ‘hub’ of the business often perform better as ownership is shown in the products or services given. Many owners feel that others can’t or won’t do the job as well as they do, so take it on themselves to stay at the core of many processes. This may be working fine for now, but the approach isn’t scalable or operationally sustainable if the new owner aims to grow the business.
Buyers are also not buying a job; they are choosing to invest in your business. If the continued success of the business post-sale is directly linked to you as the owner, then this will massively detract from your value.
Ways to reduce reliance on you:
- Process redesign and mindful delegation of responsibilities that release you from being the hub in every process
- Implement succession plans for key staff that can be trained and mentored to take over your operational responsibilities
- Develop guidelines for autonomous and accountable decision making within agreed parameters
3. Demonstrate financial predictability and any untapped potential
Buyers are buying your future streams of profit. The more predictable these are, the higher valuation the buyer will place on your business and the more you will stand out against competitors in the same space.
A further consideration is to identify any untapped market potential. A business that has peaked in its market leaves very little growth potential for a new owner. If you’re aware of untapped potential or already have a roadmap for expanding your offerings, then these must be documented and shared with prospective buyers.
Build buyer confidence in your financials and help them to see additional potential in your business:
- Categorize your revenue streams into once-off, re-occurring and recurring, then demonstrate the predictability of each to build confidence in financial returns for the buyer
- Good customer loyalty scores can be an indicator of future revenue streams, especially when using the widely accepted Net Promoter Score (NPS) methodology
- Ensure all in-progress projects have tactical action plans that show how you will deliver on the agreed goals and key performance measures that demonstrate the positive financial impact achieving them will have on the business
- Consider unpacking ideas you may have of additional offerings or markets, define what success will look like should they be realized and back them up with credible research where possible
4. Boost effectiveness with the 4 core operational tools
Acquirers look for businesses that have strong processes and systems that help them to achieve operational effectiveness. Having the 4 core operational tools implemented and working seamlessly together reduces the risk of mistakes and provides managers with key insights to improve processes.
Team Collaboration:
Enables teams to solve problems faster, identify and develop new opportunities, stay current on operational changes, and develop strong relationships.
Project Management:
Facilitates improved planning, effective task delegation, risk mitigation, administrative time saving and operational reporting.
Customer Engagement:
Helps customers to easily communicate issues, receive timely feedback, access sales information, and feel truly valued.
File Storage and Sharing:
Supports ease of accessibility, increase security, real-time backups, disaster recovery and version control.
5. Proactively identify and even approach your ideal buyer
Another great way to cut through the noise is to proactively identify and approach an ideal buyer directly. An ideal acquirer of your business will likely be 5-20 times larger in annual revenue than your business. If they are too close to your size, they may not have the financial resources to buy your business. If they are much larger than you, then adding you to their portfolio isn’t enough of a growth increase to justify the effort and time required of them in the acquisition process.
Knowing the profile of an ideal buyer can help you position your business as an attractive addition to its portfolio. An acquirer may be one of your larger competitors, but very often can be a supplier or customer wanting to secure more of their value chain, expand their customer base and diversify their revenue streams.
To proactively identify an ideal buyer for your business, make lists of business names and their estimated revenue for each of the following categories:
- Your direct competitors
- Your strategic partners and key suppliers
- Businesses in your industry that have a large sales force
- Businesses in your industry that could sell more of their product or service by adding your products or services to their offering
- Businesses that could more easily compete against competitors with the addition of your products or services
- Businesses that could expand their geographic footprint into locations you serve
- Businesses from which you recruit employees as well as those that regularly poach your employees
Once done, mark those businesses that fall into the 5-20 rule on each list. Count how many times each business is repeated and make a shortlist of those that appear multiple times, ranking them in order of high too low.
Those with the highest number of repeat appearances often match the profile of your ideal buyer. Consider approaching them directly and demonstrate the value your business has to offer. They may also appreciate the direct opportunity of not needing to compete with the open market of buyers.
What if you’re unable to implement all of the above?
You may not be able to implement all of these due to time, resource, or budget limitations. Achieving even a few can greatly increase buyer confidence in your business and help to move you up their list of potential acquisitions.
These will also maximize your valuation and reduce the risk of long earn-outs to ensure you get the best possible exit for the next stage in your life journey.
About the Author: Dylan Reevell
As the CEO of EvolveMyBusiness, Dylan heads a team of strong business minds and passionate problem-solvers, with the singular goal of making your business better.
You can find and connect with Dylan on LinkedIn
Opinions expressed here by contributors are their own.
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