Business Sale Readiness Factor #7: Risk management
Tuesday, 14 September 2021
Your business for sale can be likened to a ship. The safest place for a ship is docked in a port. The chances of it sinking are significantly reduced, but where’s the fun in that?! A ship is designed to get out on the open waters and sail to far-away destinations. That involves risk, and whilst it can never be eliminated entirely, the risk can be managed.
The same logic applies to businesses. The safest thing is not to trade at all, but if you want the rewards of profits and having a business worth selling at a future point, you’re going to have to get out there and trade. Inevitably, that will involve taking some risks from time to time. Prospective buyers will understand this, and often respect it, but they will want to be reassured that you’ve been managing your risk diligently.
The following are areas in which businesses tend to differentiate themselves from being ‘sale ready’ in this regard:
1. Having contingency plans in place for 'disasters' (fire, loss of key people, loss of major clients etc)
If little else, 2020 should have reconfirmed to business owners the need for having contingency plans in place. Indeed, whilst many can be forgiven for not having had ‘global pandemic’ on their risk registers, they all should have worked out plans for disasters with similar impacts (perhaps a fire at the head office with people being forced to work from home). Indeed, in recent years at Larking Gowen, we’ve simulated disasters to test our contingency plans, which highlighted a number of weaknesses that we were able to rectify.
2. Having no ongoing legal disputes or likely claims
This comes back to the ship and risk analogy. In practice, the more you trade, the more chances you have of disputes. These don’t necessarily need to delay a deal, but be prepared that a buyer will be cautious about the impact disputes or claims may have on the business’s long-term reputation, and they will certainly want you to indemnify them for any financial losses resulting from the claim after the sale has completed.
3. Protecting key intellectual property by patents
I touched on this in my first blog in this series, Business Sale Readiness Factor #1: Key Attractions, where I wrote about the benefits of high barriers to entry for new competitors seeking to enter your market. Protecting your intellectual property adds height to your barriers, making your business more valuable.
4. Have more than one available provider of key raw materials/inputs
Leading into Brexit, one of the things we were encouraging our clients to develop was a list of alternative non-European suppliers in case a trade deal couldn’t be agreed and supplies from existing European suppliers became more expensive (or delayed). Regardless of Brexit, it’s generally good practice to have a range of suppliers from different regions that you can rely on. It should also help you get the most competitive prices.
5. Not being overly reliant on a few key customers
The risk is obvious here. If your business is heavily reliant on a single customer (or a few) and that customer stops buying from you for whatever reason, you suddenly have no business!
It’s entirely understandable how businesses develop reliance on a few key customers; it tends to creep up on business owners without them noticing. The trick, of course, is to regularly monitor the situation and invest time and money on developing new key customers to help spread the risk.
6. Having no pension liabilities outstanding (e.g. defined benefit schemes)
This is certainly something which will turn off many prospective buyers. There’s no easy one-size-fits-all solution to this; you need to take early professional advice.
The above key factor is taken from our free and insightful ‘Sale Readiness’ diagnostic tool which aims to give business owners a score on the nine key factors determining:
- How attractive your business is for sale;
- Whether you will maximise the final business sale value; and
- The efficiency and smoothness of your business sale process.
The online tool takes only five minutes to complete and your results will highlight the top three factors which are working well and the top three factors which require the most attention before you consider a business sale process. You will also be able to see how you compare to the global benchmark (average scores of all completed diagnostics) on each of the nine factors.
Of course, if it would be helpful, my team and I would be pleased to discuss your results and guide you on your next steps. In addition, each month I will be releasing a blog, just like this one, on each of the nine business sale readiness factors to help bring them to life.
Next month’s blog: Business Sale Readiness Factor #8: People