Analyzing the Health of Your Industry Sector and Overall Market -Watching Out for Risk Factors

When selling your business, you need to assess the condition of your industry and marketplace.

Watching Out for Risk Factors (Or Being Prepared to Account for Them)

A buyer can and will overlook one of even several risks if the attributes of your business are enticing enough to outweigh the weaknesses, if you present a good plan for how necessary changes can be addressed, or if you ask a price that’s lower than it might otherwise be to compensate for the risks that come with your business purchase.

Some buyers actually seek out businesses in trouble, hoping they can make the purchase at a sacrifice price and then apply their own abilities to turn the business around. Others are willing to overlook certain risky aspects of a business in order to acquire strong attributes – patents, proprietary production processes, a strong brand name, or other features, for example. The reasons that buyers acquire troubled businesses are many, but in almost all situations buyers pay less for businesses with any of the following red flags.

• Low earnings. Remember, most businesses watt buy businesses that provide annual income of at least $100,000. If your business earnings are too low to meet this threshold, the buyer will see your finances as a deterrent to a purchase.
• High competition with low competitive advantage. Your business is a risky deal if it has strong and growing competition that significantly out-ranks you in name awareness, sales, and product and service appeal.
• No key staff. Buyers see risk in a business that rests entirely on the owner’s shoulders, with no second-in-command employee or employee team to help in a business transition – especially if the business has no distinct products or unique processes that clients will follow after the owner leaves.
• Weak operations. An unprofessional workplace and low-quality business records – especially financial reports – turn buyers away or lower price expectations.
• Low name recognition. Your business has lower value, due to lower brand value, if customers don’t know your business name or have strong positive reactions when they hear it.
• Dependency on a few clients. A buyer sees risk if you serve only a few clients, especially if those clients aren’t committed to your business by loyalty to your product or service (rather than to you personally) and by transferable contracts.
• Non-transferable business capabilities and processes. The transferability of your business is at risk if you lack managers or employees who can help a new owner keep the operation going after the old owner leaves – especially if you don’t plan to stick around during a transition period. Likewise, a buyer will see a risky seller-to-buyer transfer if systems and processes aren’t set up to allow a buyer to easily step in and keep the business running. Other transferability risks include a lack of client contracts, customer loyalty programs, and a good client database or detailed customer identification.
• A declining industry or market area. Businesses in undesirable locations, declining neighborhoods, or ailing industries carry high risks and therefore sell for lower prices.
• Expiring or problematic lease. An iffy lease is a sky-high risk if your business success is reliant on its location, as is the case with a restaurant or a business with heavy foot traffic. In fact, many brokers won’t even try to sell a restaurant with less than five years left on the lease unless the lease includes a good renewal clause.
• Undisclosed challenges. Business owners who try to hide business weaknesses or challenges create a risk rather than avoid one. A buyer will discover business challenges during the due diligence fact-finding process. If he or she finds one that you didn’t share openly, the trust established during sale negotiations can be jeopardized, and the deal may fall apart as a result.
• Unwillingness by the seller to provide financing or accept any contingent payments. If it looks like you want to wash your hands of your business the minute the sale documents are signed, buyer’s sense risk. By offering to provide seller financing, and by tying a portion of the payment price to future business performance, you’re vouching for the future potential of your business by putting your money where your mouth is.

This information was taken from “Selling Your Business for Dummies” by John Davies (Founder of Sunbelt) and Barbara Findlay Schneck