David Cummings on Startups

Characteristics of a Salable Business

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David Cummings

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Many entrepreneurs paint a picture in their mind of a strategic acquirer swooping in one day and paying an outrageous amount of money for their business. In reality, most businesses are of little value until one of two things happen: a) they have multiple years of sustained profitability, or b) they are growing fast and have at least $5 million in revenue (see The Magic of $5 Million SaaS Run Rate). Unfortunately, most startups won’t be able to find a strategic buyer.

Here are characteristics of a salable business:

  • Large, established base of customers
  • Repeatable customer acquisition process
  • Proven management team
  • Little reliance on any one person
  • Consistent profitability and operating history (e.g. three years of results)
  • Strong recurring revenue (not required, but very desirable)
  • Market with logical, complementary acquirers

As you can see there’s no reference to cool technology, innovative products, or hot ideas. Those things help, but most acquisitions are methodical and financially driven. While some acquisitions are emotional, most are not.

What else? What are some other characteristics of a salable business?

Comments

3 responses to “Characteristics of a Salable Business”

  1. Doug Calahan Avatar
    Doug Calahan

    I’ll say it ’til I’m blue in the face. After you reach minimum scale ($5m rev), for 99% of companies the only thing that matters is EBITDA. You have to ruthlessly watch expenses. As business owners we get enamored with revenue growth (at least I do and all of my friends who own businesses do). However, buyers want income, not revenue. IMO diligent expense management is the absolute key for a successful exit. Every business owner focuses on sales and revenue. Few do an incredible job at expense management (I’m not one of the few, but I’m trying).

    Reply
  2. Richard King Avatar
    Richard King

    David, I am posting this one on my (literal) wall. I am doing good on 3 of these, working hard on 2 and 2 present an interesting future focus for solving.
    Thanks for reminding me about the balance.

    Reply
  3. Al Pavins Avatar
    Al Pavins

    There is a difference between saleable and attractive to buyers. A business has to offer something interesting to the potential acquirer. Being solid and stand-up is not usually enough. It could be a great fit with another business, growth potential, location advantage, etc etc. Most investors are looking to add value.
    Step 1 in any business sale is usually the listing of potential acquirers. If a start-up was looking to sell at some point, it’s worth thinking about that list much earlier to guide strategic decision making. Gosh a serious post on a Friday 🙂

    Reply

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