Dream Business Brokers
Plenty of issues can hurt your company’s value when you put it up for sale. Some are deal killers, making your company unsellable. But most problems are fixable, given some time and investment. Here are some that raise immediate red flags for buyers.
Books that aren’t clear and clean.
Both buyers and lenders review all financial records carefully, expecting them to be balanced and easily understood. If your books aren’t organized or your income isn’t accurately reflected on your tax returns, most buyers will simply move on to another opportunity. If they can’t trust your numbers, they may also feel that they can’t trust you. It’s common in small business valuations to make certain adjustments to the earnings by adding back some expenses to arrive at the true earning potential of the company. However, excessive add-backs can raise a red flag, and it’s a bit of an art to determine what is reasonable and what is a stretch.
Not being organized means the diligence process will be much more stressful and prolonged, so it pays to get help with your books if needed. Bring in an accountant or a fractional CFO who will evaluate your financials and know how to fix any issues that will be a problem for buyers.
Liens and other pending legal problems for the business.
Buyers will be concerned about your company’s debt and how it’s structured. They’ll be concerned about significant tax liability or other obligations. They’ll want to ensure your lease, if real estate is involved, will cover the deal’s financing period. If you have any pending lawsuits or other legal disputes, you should prioritize settling them. Buyers are looking for companies with the least financial risk for the future owner.
You would also benefit from bringing in an attorney or HR consultant to ensure your company complies with employment law and safety regulations and has solid job descriptions and employment policies in place. You might even engage an IT specialist to ensure your information systems are secure. These actions will help assure a buyer that there’s no risk surrounding the issues going forward.
Over-dependence on a single source – of almost anything.
If your business is dependent on a single vendor for critical materials, a small number of customers that generate most of your sales, or a key employee who is the only one who knows how to get things done, you’re creating a red flag for buyers. Again, it’s about risk. If the vendor goes out of business or changes his terms, if you lose your biggest customer, or your employee decides to retire rather than stay with the new owner, the buyer may need years to regain what’s been lost.
By the way, if you’re the key employee who’s the only one who knows how to get things done, it’s an even bigger problem. High dependence on the owner is a common risk factor with small businesses. It’s worth the time and resources to cross-train staff and make sure you have a strong management team in place before you put your company on the market.
Declining Revenues.
Once they have interested buyers, some owners lose their focus and their drive to keep the business profitable. Both buyers and lenders look at the past three years or so of revenue, but they place great emphasis on the most recent year. A decline in revenue is a potential deal killer. It could cause a lender to present less favorable terms or decline financing for the deal, which will result in a renegotiation and a lower offer, or simply kill the deal.
This is where a business broker can be a great help to an owner. Due diligence can take months, and your intermediary can manage the process and keep the negotiations moving while you focus on keeping the business running smoothly and maintaining its value.
Buyers care about two things: profitability and risk. We take a hard, clear look at everything that might fall into those two categories and affect the value of your business. And we have the experience to help you fix the issues before you go to market.
