Why A Potential Buyer Won’t Buy Your Business, Part 2 of 3
We’re picking right back up with the risks a buyer might see when they’re looking to buy your business. There are 8 risks that often put off buyers—things that can actually drive them away and maybe even turn them into a competitor!
I went over the first three risks in the last blog, so now let’s take a look at #4 & #5.
Risk #4: Lack of growth potential
A buyer is looking to the future, what kind of growth potential does your business have under their ownership. You will probably have difficulties selling your business if you’ve exhausted the market. It may seem counterintuitive, but if you’ve been so successful that everyone has already bought what you sell, it’s likely that a buyer won’t see any upside—because you’ve already maximized the upside for yourself, leaving no room for the buyer to gain.
Remember it’s about ROI for the buyer because he/she is an investor—they’re not looking to buy your job. Financial performance is not the only dial you have to improve the value of your business, but revenue is a factor, for sure. With that in mind, a buyer might be put off if they see your business is not on a growth trajectory in terms of revenue. As the old saying goes, “If you’re not growing, you’re sliding.”
Even if you’re not losing money, you may be stagnating—you’ve reached a plateau with nowhere to go— and this could mean your competition is gaining on you/passing you, which is a red flag for potential buyers. If you’ve been successful in business up to this point, you’re probably good at putting yourself in your customer’s shoes.
You’ve got to think about a potential buyer as your customer because they are—but they’re buying your company, not a widget you make. A lack of revenue growth is, in their eyes, a sign of risk, and they wonder why the revenue has slowed or, worse yet, flat-lined. The issue for you is they probably won’t ask you those questions, they’ll just move on to another candidate—another business with less risk.
The final point I want to make here is if, you are growing and have great growth potential in the future, how prepared is your business to handle that growth? What if you were to double or triple the number of potential customers that came in the door? Would the wheels fall off the cart? Do you have the right people, tools and systems/processes in place to double or triple the number of customers you are serving? If not, your growth potential might be considered tenuous, especially when there are no seatbelts.
Risk #5: Overly dependent on those you work with.
Are you too dependent on a small group of or single employee, customer, or vendor? We talked about your business being too reliant on YOU the owner (Risk #1), but now it’s about the people you work with. We call this the Switzerland Structure — how dependent your business is on any one employee, customer or supplier. We call this your Switzerland Structure, because like the country of Switzerland your business needs to be remain neutral. Not overly aligned or dependent to any one faction (employee, customer, or vendor.)
So, the first element of your Switzerland Structure is to consider your staff. Is there one person or small group of employees that have all the knowledge, have all the relationships? If this is the case, their departure at any point puts your business in jeopardy.
A potential buyer must worry about what risk that key employee (or small group of employees) leaving might have on the business once they’ve taken ownership. What kind of situation does that new owner now find themselves in? A RISKY one, because there is a possibility no matter how loyal the employee was to you, he/she may decide to leave, taking what and who they know with them.
You have to see how this can be a risk to a buyer of your business. And while we’re talking about it, it’s not just a risk for a new owner, it’s a risk YOU face every day. Think about what might happen if you walk into work tomorrow and your top performer says to you, “I quit.” Nevada (like many other states) is an “at will employment” state, meaning an employee can leave at any point, for any reason, without having to give notice to the employer. That is a risk you should not be willing to tolerate for your business, and it is for sure a risk a buyer won’t invest in.
So that’s the “employee” side of the Switzerland Structure… Next up is the customer version. You can imagine what might happen if a large portion of your revenue comes from one client or one small group of clients—a large chunk of revenue could be lost. This is a big impact for potential buyers, but it’s also one you could face when any customer contributes more than 15% to your revenue.
Finally, many owners miss this one, but an astute buyer won’t. You may have experienced this in 2020 as a result of the pandemic or heavy winter storms that crippled much of the United States. This third element of the Switzerland Structure is your supplier (essentially your supply chain) — the vendors you work with. If your supply chain is fueled by a single vendor, in the event that vendor has trouble delivering materials to you, it is likely you will have trouble delivering your product to your customers. And that has real consequences and risk to growth, revenue, cash flow, and customer satisfaction.
You can see how this Switzerland Structure risk, the risk of being overly dependent on those you work with (employee, customer, supplier), is closely tied to many other risk factors. Your business is a living organism, and its components are connected and related—one can impact another directly and magnify the risk/pain in your business even more, whether it’s for you today or somebody else tomorrow.
So far, I’ve talked about 5 risks for why a buyer doesn’t want your business. At this point you should be seeing the theme here… a buyer won’t buy your business because you have too much risk inherent in the operations of your business.
If you are lucky enough to find a buyer that is interested in making an offer, good for you! BUT…know the buyer is discounting the offer they would have made because you’re asking them to buy a risky business. The higher degree of risk has the opposite effect of the money they’re willing to pay.
There are strategies and tactics you can implement to make buyers more confident in the odds they’ll win once they buy your business — sort of like what happened when the Tampa Bay Buccaneers signed Tom Brady. Before then, the Bucs were 60-1 to win the Super Bowl, but when Brady came on board, bettors (aka, investors) were more confident. And the good news is, it’s not likely to cost you the same $25M it cost the Bucs!
Next time, we’ll check out Risks #6-8.