Posted: 10:31 a.m. Thursday, Sept. 12, 2013
By David Mahmood
It's simple: High-risk companies sell for less. Low-risk companies sell for more. Here's how to convince a buyer that your company is low-risk.
Every day, thousands take small risks in hopes of getting a big reward. They are known as gamblers. They purchase lottery tickets, visit casinos, go to horse races, and place small bets. Most of these people do not risk much, but if they win, the reward can be huge. However, those huge casinos in Vegas were not built based upon what they paid out to winning gamblers. They were built on what they took from gamblers.
Risk versus. reward is the oldest game in investing and in life. Without risk, there is no reward. However, potential buyers of your business are not gamblers. As a business owner thinking about selling your business you need to mitigate the risk faced by potential buyers in order to maximize your own reward.
Buyers search for companies that offer low risk and high rewards. They want to purchase high-performing companies, but are not interested in assuming high risks. This is why buyers perform lengthy and detailed due diligence on any company they consider purchasing. If you want to sell your company for the maximum price, there are several things you can do to mitigate risk, maximize values, and assure the transaction closes.
Make due diligence easy
Potential buyers are going to dig deep into your financials. Make sure they are up-to-date and easy to understand. If you use an outside accounting firm or service, alert them so that they are prepared for the due diligence process.
Limit technology risks
Most successful businesses rely upon technology to operate efficiently. To minimize risk and maximize value, keep the technology your company uses up-to-date. You want to be able to demonstrate that your technology is current and has a long life span. This assures potential buyers they will not have to purchase new, expensive technology after the sale closes.
Reduce market risks
Nothing makes a buyer feel more secure than a big backlog of orders from a diverse customer base. Reduce your market risk by building long-term relationships with customers and ensuring that sales are generated from multiple customers, not just one. Geographic customer diversity also helps reassure buyers of future sales stability.
Minimize management risks
Potential buyers need the expertise and experience you and your team bring to the business. Your institutional knowledge is often priceless. Minimize management risk by building a strong management team. Add key personnel if necessary - especially in the financial management area. Many buyers do not want to run the business. They will depend upon you and your team to continue running and building the business after the sale. Minimize management risks and you will enhance company value.
Buyers do not calculate risk by looking at each factor independently. They multiply the factors together. You may have strong financials, amazing technology and a great team, but if the majority of your sales come from one customer, the entire value of the company can easily drop dramatically. Likewise, having a strong diversified customer base can be devalued by poor financials or old technology. Buyers measure risk and ascertain value by combining how well your company measures up on all factors.
Buyers do not commonly invest in high-risk deals. Even when the high risk could equate to a higher return, they normally seek safer ground. The high-risk companies sell for less, while low-risk companies sell for a premium.
The final sale and value of a company involves more than risk evaluation. It is also a question of reality versus perception. If a buyer perceives a risk, the seller must immediately address that perception. The ideal way to reduce the perception of risk is to address any questions: directly, thoughtfully, confidently, and candidly. The more you can reduce the perception of risk the more likely the deal will close and company value will be maximized.
Don’t roll the dice with the sale of your company. Reduce or eliminate risks that could jeopardize the sale. Be prepared, and consult with investment bankers, attorneys, financial advisers and others who specialize in selling businesses. Then, you can minimize risk and maximize value when you sell your business.