Insights & Events

Why your business may be too risky for buyers

By Pavilion


Risk factors

Buyers want to purchase businesses that will make money. Obviously. They want companies that have systems in place to successfully operate without excessive supervision on their part. A buyer’s willingness to pay the asking price depends on the buyer’s perception of risk.

The buyer’s perception of risk is affected by the following risk factors:

Transferability Risk

Will you be able to seamlessly transfer the business to a new owner?

Sales – If sales are based on close relationships with customers or your superior abilities as a salesperson, will a new owner be able to replicate this? A sales system must be in place to reassure a new owner that the business can convert new opportunities into close sales, without your presence.

Marketing – Does your marketing rely on personal relationships or some sort of club membership? If no standard marketing programs are in place, a buyer will see this as a large investment that will have to be made upon acquiring the business, increasing their risk.

R&D – If your individual creativity and knowledge is crucial to the success of the business, be sure to document the existing products so improvements can be made by any competent person without your guidance.

Production and delivery – How involved are you in the day-to-day business operations? Does the company heavily rely on your physical abilities? Are your expert builder or designer? Be sure to have additional experts on your team that will be able to take over your position. If a new owner requires a specific skill set to operate your business, the pool of candidates willing to purchase your business will become smaller.

Concentration Risk

Does your business rely on a select few to be successful?

You – The greater your business’ reliance on your skills and relationships, the riskier it is to a buyer.

Key Staff – If key employees are heavily relied on for their skills and connections, the riskier it is to a buyer. To mitigate this risk, develop procedures and operating systems to prevent too much power concentrated with any one employee. Incentive programs and benefits will likely keep key employees on board. Incase employees do leave your company, a strong non-compete agreement will keep the business protected.

Customers – High customer concentration results in a high risk for buyers. For example, if you have one or two customers that represent more than half of your annual revenues, the riskier your business is to a buyer. If these one or two customers decide to choose another source to meet their needs, then your business will not survive. Have a diverse range of customers as contingency plan. This ensures that your business will keep operating successfully even if you lose your biggest customers.

Suppliers – Don’t allow your business to rely on a sole supplier for key component parts. Always have at least a few suppliers your business can purchase from in case one vendor either cannot meet your product requests or it goes out of business.

All of these factors influence a buyer’s perception of risk and will result in them either walking away from the deal or greatly reducing the price they are willing to pay.

You must mitigate your risk factors and improve the attractiveness of your business or you must be willing to accept a lower price for your business.

To read more about business risk factors, click here to visit bizacquisition.com.

Source: Business Development Solutions, bizacquisition.com

 

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