Reduce Risk and Increase Value | O'Keeffe & O'Malley

Reduce Risk and Increase Value

Mar 09, 2018

Every owner wants top dollar when selling their business. But so many folks leave money on the table by overlooking risk. If you can identify risk and reduce it, you can effectively increase your sales price and probably sleep better at night too. Here are some things to consider.

Customers and vendors: Variety is the spice of life – and key to reducing risk in your business.

  • Customer contracts – Are your customers locked into a long-term relationship with your business? Long-term contracts that are assignable to your successors are very attractive to potential buyers. They indicate that your customers are happy and in it for the long haul.
  • Customer diversification – If the majority of your business comes from just one or two customers, that’s a risk – and a red flag to a potential buyer. What happens to the business if those customers go away? Work on bringing in new customers to expand your client base.
  • Supplier variety – Much like depending on a small pool of customers, leaning on just a handful of suppliers can lead to trouble. Relationships with diverse vendors give your business flexibility and can demonstrate good standing in the industry.

Your people: Keeping your house in order can grow your business and cut potential risk.

  • Employee retention –When you lose an employee, you lose institutional memory. Tie key employees to incentives like bonuses or phantom stock. This will help maintain consistent leadership and assure buyers that the business is steady.
  • Internal documentation – If it’s not in writing, it doesn’t exist. Utilize a thorough employee handbook to spell out expectations. Document processes, systems, and personnel roles for all positions. This documentation will give a potential buyer a company roadmap – and peace of mind.
  • Owner dependency – The business is your baby, but it should be able to survive without you. Have leadership and systems in place to shift responsibility away from you. If the business is heavily dependent upon you, that’s a risk many buyers won’t want to take.

The bottom line: It always comes down to money, so make sure your financials and insurance are in good shape.

  • Insurance check-ups – Have your policies reviewed each year. Consider additional policies for:
    • Errors and omissions
    • Data breach / cyber liability
    • Employment practices
    • Directors and officers
    • Business interruption
    • Terrorism
    • Excess casualty

Your insurance agent can help you find coverage that meets the changing needs of your company.

  • Banking relationships – Have dealings with more than one bank. These relationships are like those with customers or vendors; don’t put all your eggs in one basket. At the very least, keep your personal and business finances separate.
  • Clean financial reporting – Many businesses don’t have accurate accrual monthly financials with clean cut-offs according to GAAP. Even if the books are in decent shape, this failure signifies a risk to potential buyers. It introduces doubt about reporting systems and management.

Putting it all together

Reducing risk can make a difference in the speed of a business sale as well as the final price. Getting prepared before you go to market can really pay off.

If you have questions about selling your business, a mergers and acquisitions advisor can help. Call O’Keeffe & O’Malley at 913-648-1085 for a confidential meeting.