Selling your business is all about minimizing risk to buyers. Buyers are going to look at and evaluate a business differently than a seller/owner might. A business owner may think that they have a great business simply because they have strong sales and are profitable. Profits and earnings are important, but buyers are looking at a much bigger, broader picture. Let’s discuss three red flags that indicate risk to a buyer.

Red Flag 1: Owner Dependency

In the simplest terms, if a business falls apart if the owner is not there, that can be an instant deal-breaker. Owner dependency can manifest itself in many ways and is relative to each business. Some businesses have a team, others are a one person show. A common theme across most businesses, regardless of size, is people tend to work harder/better when their boss is there. This of course is a spectrum. If an owner can’t step out for even a day without things falling apart or if the team fails to work independently, that presents a problem. That problem, for buyers, is risk. Compare that to a business where the owner is free to take 2 weeks or a month off with no operational problems. Or maybe the owner only works 10 hours a week. These are the types of businesses that are attractive to buyers. What if a business is just one person? Does that mean it’s not sellable? Absolutely not! Let’s say a business is run by a single owner, but they have highly detailed and structured processes that are easily taught and repeatable. This ties us into the next red flag to buyers.

Red Flag 2: Weak or Undocumented Standard Operating Procedures (SOP)

As said above, well documented, transferrable processes are great and help minimize risk to a new buyer. The new owner knows that they have all the tools at their disposal from the new owner to ensure a smooth handoff. Well documented SOP does not apply only to small businesses or single employee businesses. SOP scales from the smallest to the largest businesses and is just as valuable in all cases. If a business owner has no documentation for the critical inner workings of the business, such as training procedures, customer service protocols, onboarding processes, supplier relationships, and other key systems, it creates risk for a buyer. If all institutional knowledge is floating around between the owner’s ears, how can a new owner be expected to operate the business at the same historical level/standard? A transition period can help to mitigate this risk, but the best mitigation is to be proactive and ensure you have strong, clear SOP. Would you want to buy a manufacturing company that has no instructions on how to make and assemble a product? Eliminating the guesswork will make your business more valuable.

Red Flag 3: High Customer Concentration

One of the first things buyers want to know is what your customer base looks like. If they see a significant portion of your business is coming from a single customer, that presents an immediate red flag. Let’s say you have one customer that represents 40% of your gross revenue. The loss of just one client would have a detrimental impact on the business. You may be thinking, “I have high customer concentration, but they’re bound by contract!” That’s all well and good for the length of the contract, but regardless of the length of the relationship, there is no guarantee that contract will be renewed, especially under new ownership. Your biggest client may work with you, not just because of the services you offer, but because of the personal relationship that has been built. Loyal clientele is great, but for a new buyer, only if they are loyal to the business and not the owner. Clients may decide to go elsewhere if they know the business is under new ownership or soon to be under new ownership. Diversifying your customer base will be more attractive and more valuable to a buyer. 8 customers each accounting for 5% of your revenue is more attractive than 1 customer representing 40% of your revenue.

The good thing about these red flags is they can be mitigated before you decide to sell. You want to make sure you are putting your best foot forward when it’s time to sell your business to unlock the true value of what you have built. If you want to discuss how buyers are going to look at your business or if you want to maximize your value, let’s talk! Head over to our website to get the conversation started and learn how you can secure the financial future you deserve! When it comes to selling your business, there are no do-overs.