Risky Business? 6 Risk Characteristics that Hinder Business Owners from Realizing Value
The market is hot, buyers aren’t skittish, interest rates are low, and your business is really doing well. According to most business appraisal experts, this hypothetical moment would be the perfect time to sell your business.
But not so fast.
There are often overlooked aspects of a business that can significantly lower its value when the time comes to sell. These six risk characteristics can actually hinder your ability to realize the maximum value of your business.
- The business is too dependent on you.
Many business owners are such an integral part of the day-to-day operations of the company that they are simply unable to hand anything off to anyone else. Perhaps it’s a key piece of knowledge or a skill that only the owner possesses, the business is structured poorly, or they’ve created a rigid top-down culture.
Whatever the reason, if the company is completely dependent on you in order to function, you are positioning yourself for trouble. Focus on creating seamless systems and processes, so that your business runs well whether you are there or not. Otherwise, potential buyers will be scared off. And those who do stick around aren’t going to make very good offers.
- Your financials look amateurish.
In much the same way that an AOL email address doesn’t exude professionalism, financial statements created with Excel or Sheets send the wrong signals to prospective business buyers and investors.
Serious investors don’t consider them to be valid. These kinds of documents are too easily manipulated, and one wrong data point can skew the entire thing. A better option is to use reputable accounting software such as Quickbooks or Xero. Good accounting software sends the message that you are serious about your business…so buyers should be too.
A related unattractive financial move is to operate your finances without good internal control procedures since you run the risk of exposing yourself to mistakes or fraud. Create solid financial systems such as separating duties between multiple people, controlling access, standardizing documentation procedures, and establishing authorization requirements for certain transactions. (Chron has a good article on the subject here.)
Having professionally prepared financial statements from an accounting firm is much better than having internally prepared financials via accounting software. When you want to sell your business, audited or reviewed financials go a long way toward credibility and help ease the burden of financial due diligence.
- Your personal life is showing up in your business finances.
Buyers and investors are interested in buying your business. They aren’t wanting to buy you (see also, point #1). So make sure that your personal expenses aren’t mixed in with your business finances. Save business expense accounts for business expenses. (For a simple and effective strategy for keeping multiple business accounts separate, take a look at Mike Michalowicz’s book Profit First.)
- Too few individual customers account for too much of your revenue.
If you have a small number of clients that account for a majority of your overall revenue, you are considered to have a high customer concentration.
While you may be able to focus more quality attention on a few customers, you may be sending red flags to prospective buyers. Dependance on a small number of customers actually devalues your company.
So diversify your customer base, or find ways to serve clients across multiple industries. That way your business will come across as much more stable and desirable.
- Your business’s market position is indefensible.
A defensible market position involves qualities like being the first to market with an idea, constantly innovating, creating a loyal community, providing remarkable customer service, and ultimately improving the lives of your customers. If your business is weak in any of these areas, buyers will pick up on that and be much less likely to engage with you. If you make a great widget, but it doesn’t really make anyone’s life better…no one is going to be interested in buying your company.
- Your product only sells one time.
Non-recurring revenue (like large project-based revenues) is not nearly as appealing to business buyers and investors as recurring revenue. Investopedia defines “recurring revenue” as “the portion of a company’s revenue that is highly likely to continue in the future.”
If your product or service is typically purchased one time, constantly forcing you to then go find new customers, look for ways to create recurring revenue through supplementary items and add-ons. (For example, razor blades that only fit the handle you sell.) Or consider restructuring your entire operation so that your primary revenue sources are recurring. It worked for Adobe. Even though they saw a 35% decrease in revenue the first year they switched from selling boxed software to the subscription-based Adobe Creative Cloud, four years later their stock price had nearly tripled in value!
Let us help
Southard Financial is a leader in business valuation. We have seen it all, and understand how to keep your business from suffering from these risky positions—and many more.
Before you decide to put your business on the market to be scrutinized and criticized by buyers and investors, give us a call. We’ll go through your business with a fine-toothed comb and help you establish what your company is truly worth.
Connect with us online, or give us a call at 901-761-7500.