Risky Business: How You Can Reduce the Risk Your Business Presents to a Buyer

Risky Business: How You Can Reduce the Risk Your Business Presents to a Buyer

Unless your buyer has a gambling habit, chances are they’re not looking to roll the dice on purchasing your company. That’s why taking steps now to reduce the perceived risk your company poses to a potential buyer is a smart idea. Businesses with lower inherent risk will fetch a higher multiple and overall valuation.

Convince future buyers that your business has a high probability of delivering the desired return and of growing in the future by making sure you have the following items in place:

Recurring Revenue

Recurring revenue is more predictable and more likely to continue well into the future than sporadic revenue. Buyers like that. If it makes sense for your company, implement subscriptions, monthly service fees, retainer fees, membership fees, annual licenses, and/or renewing service contracts.

Proper Legal Structure

If you haven’t incorporated your company yet, consider filing for “S” status rather than “C.” Both enjoy limited liability, but S corporations are taxed as a pass-through entity, while C corporations are taxed twice. This can scare off a buyer. Read more about the difference between S and C corporations—and the eligibility of each—in Robert W. Wood’s informative Forbes article.

Clean Financials

Sketchy financials are not something you want to bring to the sales table. Make sure your company’s records are solid by having your financial statements prepared by a qualified CPA and having an independent accounting firm regularly audit your books.

A Diverse Customer Base

I’ve written before about the importance of having a diverse customer base. The Business Decisions You Can Make Now That Will Drastically Impact Your Company’s Long-Term Worth. No buyer is going to be happy if they see that the majority of your earnings come from three clients. Focus on broadening your customer base now to provide your buyer with some stability and peace of mind.

A Comprehensive Owner’s Manual

Document, document, document. Having everything from your sales processes to your quality control methodology to your ways of getting leads down on paper will assure your buyer that post-sale transition will be smooth. Learn how to create a comprehensive owner’s manual by checking out our previous blog post, “The Road Map: Creating an Owner’s Manual for Your Business.”

A Strategic Growth Plan

Buyers want to see that your company isn’t a one-hit wonder. You’ll receive a higher multiple if you can convince your buyer that your business will grow after the deal closes. You can present the product development ideas, facts and figures on your market and the economy, plans for future acquisitions, and more. Time to do your research. Check out our blog post “Room to Grow” for five great ways to show your buyer your company’s success is on the rise.

If you have any questions about the book, the exit-planning process or our services, please contact us. We’d be happy to help you.