Reduce the Exposure of Risk to the Buyer
Reduce the Exposure of Risk to the Buyer
One of the main factors that influences the length of time to sell a business and the price achieved is how easy is it to buy the business. We are not talking about financing the business but instead the exposure or risk the buyer is opening themselves up to purchasing the business.
When a buyer is evaluating the risk in buying a business, they concentrate on 3 aspects:
- What issues will I have to deal with if I purchase this business?
- What are the inherent risks in buying this business?
- To achieve my objectives for the business – what costs, delays, problems and stresses will I have to deal with?
If you are selling your business and you know buyers are going to concentrate on these 3 main areas of risk, then the seller must try to anticipate what the buyer will look for and try to reduce, mitigate or eliminate those risks. The seller will not be able to anticipate all the risks, however the less road blocks the seller has, the increased chances the seller has of selling the business in the shortest period of time and achieving a higher price possible.
So what is risk to the buyer? It is anything which will cause delays in exploiting the business potential or opportunity. This includes anything that creates costs to the buyer to take advantage of buying the business. Detailed below are areas of risk a buyer will consider when determining if they will buy a business:
- Lack of financial records
- Staff knowledge
- Systems for knowledge transfer
- Client records
- How clean the business is
- Reputation of the business
- Plant and equipment age and condition
- Payroll information up to date
- Supplier contracts signed and current
- Harsh lease conditions
- Poor quality products
- Is performance being tracked – is it on track to achieving targets
- Business reliance on the owner if no longer there
- Competition
- Can this business grow or is it in decline
Understanding potential risks to the buyer and resolving them prior to putting the business on the market is the best way of preparing a business for sale. As the buyer does not know the seller, every single step of the listing and negotiating process is being judged by the buyer to assess the level of risk. The higher the risk to the buyer, the less likely the business is to sell and achieve a high price.