Risk scares a group of business buyers.

Too Much Risk: The Parts of Your Business That Will Scare Off Potential Buyers

Many prospective business buyers are risk-averse. They’re quick to spot the threats, red flags, and uncertainties that could impact a business and undermine its odds of success. Many avoid entering deals with more-than-minimal risks. Some will even pay a premium for businesses that seem to be a safe bet.

Your goal, as a seller, is to bolster your potential buyers’ confidence in your business. One of the best ways to do this? Think like a prospective buyer.

 

How do I do this?

Long before listing your business, you should start identifying the parts of it that could turn away risk-fearing buyers.

Here's how to go about it. Make a long, complete list of your internal weaknesses, systemic threats, competitive forces, and industrywide issues that may deter your target buyers. Through the list that you create, you should be able to identify certain risks as manageable, moderate, or in some cases, insurmountable. Focusing on the risks that you can control, think about the actions you could take to reduce those sources of risk.

 

What are some of the risks I might find in my business?

Every business will have its own set of risks, but many small businesses share some commonalities. With this in mind, try to assess your business for the following risks and consider others that might worry your pool of potential buyers:

1

Your business depends on you, the owner, for operations, connections, and knowledge.

Prospective buyers may be scared off from buying a business that needs your specific experience, knowledge, and insight to run at full capacity.

 

Navigate the risk: Hire a manager. Long before selling your business, you should consider hiring an experienced operations manager who can not only navigate the day-to-day workload but also forge relationships with your connections to ensure that the business will keep performing at its best after you transition away.

2

Your biggest customers aren't locked into a contract or their contracts are nearing an end.

Your buyers will want some assurance that your past sales numbers can continue into the future. Without the promise of enduring contracts, your buyers won’t have the confidence they need to form reasonable projections about future sales.

 

Navigate the risk: There are two steps you can take to mitigate this risk.

 

First, try to extend your expiring contracts—especially those that represent a significant percentage of your sales—before listing your business.

 

Second, reach out to your key noncontractual customers. Offer incentives that might entice them to enter a contract with your business—one that’ll endure long past its sale.

 

Both moves will help you and prospective buyers to firm up your business’s sales forecasts and eliminate a pain point for your potential buyers: having to negotiate new contracts immediately after taking on your business.

3

Your revenue is concentrated.

Buyers will want to see that you have diverse sources of revenue. Specifically, they'll want to see that your business's profitability doesn’t hinge on a single customer, project, or product that could derail, wind down, or fall out of favor.

 

Navigate the risk: Thinking about introducing new streams of revenue by adding adjacent product lines, offering more services, or securing new customer contracts. When possible, try to take on this work long before you list your business for sale. This is key for helping buyers to make projections on the benefits.

4

Your suppliers aren't under contract.

Potential buyers may shy away from your business if you don’t have an agreement in place with your key suppliers. They’re much more likely to feel confident about the relationship continuing after the transition of your business if you have a contract in place with the most important contributors to your end product or service.

 

Navigate the risk: Connect with your suppliers and see if you can establish a commitment that’ll endure after the transition of your business. If a contract isn’t possible, try this. Ensure that a key member of your team builds solid working relationships with your most important suppliers. This will help you firm up the business's ties with its key vendors and keep those relationships strong.

5

Your financials contain some questionable line items or write-offs.

Your pool of potential buyers will lose confidence in your business if they find red flags in your financial documents. Many will avoid making deals with business owners who have made questionable tax moves, report implausible add-backs, and show wild inconsistencies in figures or manners of reporting.

 

Navigate the risk: Before listing your business, you should meet with a professional accountant who can help you prepare financial statements that reflect the true state of your business’s financial wellness. Lean on their advice to navigate tax moves and report expenses. This will help your buyers form the clear picture they need to build trust in your business.

 

Interested in connecting with an accountant? Check out these popular firms:

 

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6

Your employees are loyal to you, but maybe not to your business.

Your buyers will want to learn about your key employees and whether they'll continue in their roles after the transition. Threats of turnover might scare them. This is often the case in businesses that have few employees, demand extensive training, or lean on a few critical personnel who, alone, own the knowledge the business needs to succeed.

 

Navigate the risk: If you’ve been asking new employees to sign non-compete agreements, then you’ve already taken an important step to ensuring that your business’s knowledge won’t leave when the keys to your business change hands. Of course, those agreements won’t help you to retain your employees. Start thinking about programs or incentives you could implement that would encourage them to stay on through the transition.

 

Here's another way to mitigate the risk. Start drafting complete procedure manuals and guides that’ll help the new owner after the transition takes place. These guides should cover your protocols and processes in detail and ensure that the owner can take on the work even if they lose every member of your core team. 

7

You don't have a key differentiator from your competition.

Many of your buyers will be looking for the critical factor that sets your business apart from its competition. This differentiator may be a difficult-to-replicate product, process, or service; expert knowledge; proximity; or another factor that makes your business the one that customers will choose time and again.

 

Buyers may not be turned off by the lack of a clear advantage. But most will be eager to know how one could be built—and whether any of your business’s competitors have one they use to get ahead.

 

Navigate the risk: Before listing your business, you should assess your business’s critical competencies. Consider how those competencies help you deliver value for your customers and how they differentiate you from your competition. Be prepared to share this information with your buyers in an open, honest way to help them understand the business's advantages and the competitive challenges it faces.

8

You aren't interested in providing advice or support after the sale.

Your buyers will want assurance that they can connect with you for guidance, support, and feedback after the transition of your business. If you show little interest in helping or communicate that you won’t be available post-sale, your buyers may worry. They might see your refusal as a sign that there are problems in the business or market that you want no part in solving.

 

Navigate the risk: Commit to making yourself available to the new owner for the first several months after the transition. Your buyer will be grateful to have your insight and knowledge through the initial part of the transition.

 

If you wish, you could offer to consult the business after your agreed-upon period comes to an end. It's perfectly acceptable to ask for a consultant's fee for this work.

What’s next?

There are many steps to selling a business, from finding buyers and navigating confidentiality concerns to setting a sales price and working through negotiations. We can help you with every part of the process. Log into your owner’s portal for a free step-by-step guide.

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