Insights

What a buyer looks at before making an offer for your company

· 5 min read

When you sell a business, it can feel as though the buyer is judging everything at once: the accounts, the customers, the team, the premises, even you. In practice, most serious buyers are trying to answer a small number of questions. How much profit does this business really make? How likely is that to continue? And what could go wrong after the owner steps back?

Understanding those questions puts you in a stronger position. It helps you prepare, avoid surprises late in the process, and judge whether a buyer's offer is fair. Here is what we, and most buyers of owner-managed businesses, look at.

Sustainable profit, usually expressed as EBITDA

Most buyers start with profit, and most express it as EBITDA: earnings before interest, tax, depreciation and amortisation. It is a rough measure of the cash the business generates from trading, before financing and accounting choices.

What matters is not just the figure in your last accounts but whether it is sustainable. A buyer will usually look at three years of accounts plus current management figures, and will make adjustments, often called "normalisations", for things such as:

  • One-off costs or income, such as an insurance payout or a large legal bill.
  • An owner's salary that is well above or below what a replacement manager would cost.
  • Personal or family expenses run through the company.
  • Rent paid to the owner for premises, if it is not at market rate.

Be ready to explain each of these. A buyer who can follow your numbers easily is more likely to trust them, and trust tends to show up in the price.

Customer concentration

A business with one customer worth 40% of sales is a different proposition from one with two hundred customers, none worth more than 5%, even if the profit is identical. The first is exposed: lose that customer and the business changes overnight.

Buyers will ask for a breakdown of sales by customer, usually over several years. They will want to understand:

  • How much of turnover comes from your largest customers.
  • Whether there are written contracts, and how long they run.
  • How long key customers have been with you, and why they stay.
  • Whether those relationships depend on you personally.

High concentration does not rule out a sale. Many good businesses have one or two anchor customers. But it is far better to raise it yourself, with the history and the contracts to support it, than to have a buyer discover it in due diligence.

Management depth

For a buyer who intends to keep the business running, the most important question is often who runs it day to day. If the answer is "the owner, for everything", the buyer has to plan for what happens when you step back.

Buyers will look at:

  • Who manages operations, sales, finance and quality.
  • Whether there is a clear second tier of people who could step up.
  • How decisions are made when you are on holiday.
  • Whether key staff are likely to stay after a sale.

Strong management depth reduces risk for the buyer and, usually, the amount of time you will be asked to stay on afterwards. If you plan a phased handover, it gives the buyer confidence that the handover will work.

The rest of the picture

Beyond those three areas, buyers commonly look at:

  • Recurring and repeat work. Contracts that renew and customers who come back.
  • Margins and trends. Whether profit is stable, growing or slipping, and why.
  • Working capital. How much cash is tied up in stock and money owed by customers.
  • Assets and premises. The condition of equipment and vehicles, and whether the business owns its buildings.
  • People and contracts of employment. Terms, pensions and any disputes.
  • Compliance. Licences, permits, health and safety, environmental matters and tax.

The due diligence timeline

Once you and a buyer have agreed the main terms in writing, usually in Heads of Terms, the buyer's advisers check the detail. This is due diligence, and it typically covers financial, legal, tax, commercial, operational and HR matters.

In our process, you get a firm yes or no within 20 working days of seeing three years of accounts, set out in Heads of Terms at around week 4 from the first call. Due diligence then runs to around week 12, with the sale agreement drafted in parallel rather than afterwards. We aim to complete in 8 to 16 weeks overall. The pace depends mostly on how quickly information can be shared, and it can slow down if you want a more gradual exit.

Due diligence is where unprepared sales lose time and sometimes value. Questions that could have been answered in a day take weeks when documents have to be found.

How to prepare

You do not need to do everything at once. A sensible order is:

  1. Get three years of accounts and current management figures ready, and ask your accountant to prepare a simple bridge from reported profit to adjusted EBITDA.
  2. List your top customers and suppliers, with sales, length of relationship and contract terms.
  3. Gather key documents: customer and supplier contracts, leases, employment contracts, licences, insurance and any disputes.
  4. Write down how the business runs, and who does what.
  5. Bring your managers forward with key customers before you start the sale.
  6. Speak to your tax adviser and lawyer early, especially about structure and timing. Rules differ between the UK, Spain and other EU countries, and they change.

For the wider picture of timing and preparation, see our guide on how to sell your business when you want to retire. Keep all of this confidential. Nothing sensitive should be shared until a buyer has signed an NDA.

Talk in confidence

If you own a profitable business with £/€1m–25m turnover and £/€250k+ EBITDA in Manufacturing & Automation; Transport, Logistics & Storage; Construction & Services; Facility Management; Management & Consulting; Environmental & Waste; Rail, Marine & Airports; or Mining, Minerals, Oil & Gas, and would like to understand how a long-term buyer would look at it, we would be glad to talk. Neocore Holdings buys to keep, and we prefer to buy shares so that contracts, licences and staff stay exactly where they are.

A first call takes 30 minutes and commits you to nothing. Use the confidential enquiry form on our home page or email hello@neocore.uk. Bring your adviser if you have one.

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General information only, not tax, legal or financial advice. Please take your own professional advice.