As you think about selling your business, it’s important to consider the factors that will be evaluated by prospective buyers. When a buyer is deciding whether to make an offer, and at what price, it often comes down to assessing risks. You may already be managing some of these risks in your business today, while others are external to your direct influence. It is important to be aware of both types, and how they can affect you and a prospective buyer. Below are the most important business risks we evaluate in every deal. We suggest all owners identify how these factors affect their business and work to manage them.

Economic Sensitivity

All buyers consider the potential consequences to a business when the economy dips. There are many ways to look at this, and numerous approaches to arrive at a thorough answer. First, we look at recent trends. We ask for business revenue and profits between 2007 and 2009, and if available, data surrounding the the 2001 downturn. We want to see the actual results. After understanding the actuals, we then ask for the owner’s narrative of the business during that time. This allows us to estimate the level of recession risk. Fundamentally, we want to understand how much a business is affected by macroeconomic trends. We divide companies into three categories when determining their economic sensitivity. Businesses that:

  • become less profitable on percentage basis, but don’t lose much revenue,
  • experience large and downward swings in revenues and profits,
  • that become unprofitable, costing the owner money to just to keep open.

You should review how your company performs in a downturn, and determine steps you can take to recession-proof your business. This means understanding and analyzing your customer base, the product offerings, the business model, pricing strategy, and purchasing strategy. There may already be aspects of your business that are quite recession-resistant, allowing you can focus on other areas to make your business more recession-proof.

Customer Concentration

Many privately owned companies, especially those that serve other businesses, rather than consumers, start on the back of a single customer account. To grow, they must add more business accounts. Sometimes a high value, marquee customer comes along that makes the company. While those types of customers are tremendous milestones for a growing company, to a buyer, these individual customers are risky. In every deal we evaluate, we want to know what happens to revenue and profits if you lose your top customer or top 5% of customer base. We call this a customer concentration assessment and it’s a good indicator for measuring how quickly a company can unravel if there are any hiccups during an ownership transition. Businesses with a broad customer base and low concentration are much lower risk for buyers.

Risk of Losing You

One risk that is often overlooked by owners is the business’ dependence on them. Owners that can successfully separate themselves from the success of the day-to-day operation stand the best chance of selling their company at a high price. While it is nice to be needed, as an owner, you should constantly be trying to ‘work yourself out of a job’.

We encourage owners to ask themselves: “If I were to disappear for a month, would the company continue to be just as successful?” If you are quick to answer ‘yes’, then you probably have right amount of support in operating your company. If this question makes you uneasy, then it’s time to take a hard look at the structure your business needs to continue to grow and be successful. Not only does it make the business more attractive to buyers, but it often make your life better, too!

External shocks

Similar to recession risk, buyer try to evaluate external forces that have potential to create disruptions in your business. These forces may be specific to your type of business, your industry, or even your geography. Do the profits rise and fall with the commodity price of oil (logistics companies), milk (cheesemakers), or a rising minimum wage (retail stores)? Does business halt when the real estate market slows down (residential inspectors)? Is there a possibility a weather event disrupting the business for an extended period of time (hotel operators)?

As an owner, you must have a thorough understanding of these critical exposures. Buyers will judge a business on how well an owner has identified these risks and their plans to address and mitigate them. Having these plans will give a future buyers piece of mind, and can sometimes save a business from disaster when a ‘what if’ scenario becomes a reality. An additional benefit is that performing an external exposure analysis can identify new ares of opportunities for a business.

As an owner, you need to be smart about how you deal with these risks. Some business risks will inevitably become realities, and when they do, some planning can save years of potentially lost income. Owners that practice smart risk mitigation make their lives, and the lives of the next generation of owners, easier. By planning and implementing risk mitigation measures, owners can justify a higher valuation on their business, which is money in your pocket in the long run.