Dealing with Problems In Your Business
Very few businesses are perfect. Having a few problems in your business is normal and will not prevent you from finding a buyer who wants to acquire your club or business, but not dealing with those problems correctly can cause problems.
Properly identifying, addressing, and disclosing these problems to potential buyers can mean the difference between wasting your time and money trying to find a buyer and actually closing a deal.
Learn How to Identify Problem Areas
For many business owners, identifying the problems can be difficult. Because you run your business on a daily basis, many problems or risks may seem like normal every day issues to you. Your business is profitable so what’s the problem?
However, from a buyer’s perspective, the buyer is about to pay you a multiple of your annual earnings, many risks that you are comfortable with may seem significant.They don’t have the experience you do in running your business, and as such, every potential risk seems significant. Because of this, it is important that you try to view your business through the eyes of a buyer to help you identify what could be perceived as risks, that either reduce the value of your business, or worse, make it unsaleable.
As a part of our standard Market Assessment and Valuation process we help you look at your business the same way a buyer would. This often identifies perceived risks that could negatively impact the value of your business and are often issues that you hadn’t even considered.
If you are not ready for us to prepare a Market Assessment and Valuation for you, you can identify risk areas by considering the following:
- Do a S.W.O.T. analysis on your company. Be thorough with it and be honest. Pay attention closely to the weaknesses and threats category.
- Look for areas where you have a high dependence. Do you rely on a key employee? Are you dependent on one key vendor? Does on a single product or program or group of customers account for a big part of your revenue?
- Are your revenues and earnings trending upward or downward?
- Are your margins above or below industry averages?
- Is your service or core product at risk of becoming irrelevant?
- How actively involved are you in day-to-day operations of your business?
How to Handle Trouble Areas
Once you have identified areas that could be perceived as potential risks by a buyer you need to determine how to best deal with them.
The first question to answer is whether or not the risk can be eliminated. For example, if you are planning to sell your club or business one year from now and you have identified that your business relies heavily on one key vendor, you could do research on alternative vendors and their requirements. You do not need to start using them, but having the information for a buyer will illustrate that this vendor reliance is not a real risk.
Whenever possible, eliminating the risk is your best option.
But not all risks can be eliminated. If they cannot be eliminated, you need to at least mitigate them. For example, if your business relies heavily on a key employee or employees, the buyer may be concerned that these employees might leave after the sale and compete against the buyer. To mitigate this risk, well in advance of a sale you might want to have all of your employees sign employment agreements that contain confidentiality, non-solicitation and non-compete provisions. This will give the buyer comfort that if these employees did leave, at least the could not compete against him. Mitigating your risks involves demonstrating why the perceived risks are smaller than they may initially appear.
Simply Disclose Them
There are certain risks that simply part of any business and there is no way for you to mitigate or eliminate them. In these cases, your best option is to disclose them in an upfront and honest manner. We have learned over the years that there are buyers can get comfortable with many risks as long as they can properly measure and evaluate the risk.
We have been successful selling businesses with declining revenues or that had margins that were below industry averages. Once a buyer is aware of this and has a good understanding of the underlying causes, they can properly evaluate the risk, factor in the cost or investment required to address these issues, and then properly value the business and structure the transaction.
The risk is still present, but by disclosing it to buyers upfront they could determine whether that risk was worth taking on.
Whatever You Do Avoid Surprises
Whatever you do, do not conceal or misrepresent an actual or potential issue with your business. Buyers will invest a lot of time and money to do legal, financial and operational due diligence on your company. If there is a material problem, there is a 95% chance they will identify it at some point during the process. When they do, it will have a ripple effect. First, it will severely erode your integrity and credibility as a seller and will cause the buyers to question everything else you’ve told them. Second, they may use it as an excuse to renogiate any valuation or terms that were previously offered. Third, it may cause the buyer to question whether you are the type of person they feel comfortable doing business with. And fourth, if the surprise is discovered after the closing, it could expose you to legal liability.
As a result, be upfront with buyers about the risk and issues your business faces. Identify them, eliminate what you can, mitigate what you can’t, and disclose the rest. Buyers are in the “risk business” and can get comfortable with many risks if you are honest and upfront about them.