It’s never easy knowing clearly whether your business is high risk or not, but it could. It could be doing really well, making great returns and seemingly on a good trajectory. It might seem like the perfect time to sell it only to realize that it’s a high-risk business.
Essentially, a business would be termed a high-risk undertaking if it fulfills certain criteria. Firstly, if the company is within an industry that’s clearly high-risk then any potential buyer would think hard before any deal comes your way. This can be a company facing potential health hazards as well as safety issues or a high likelihood of injury to the populace, employees or other. It could also be an establishment in a highly regulated industry by the government, safety bodies or local councils.
Future monetary failure
Another criterion is the threat of monetary failure. Very few would want to invest their funds or time in a company where potential to make profits and better margins in future doesn’t seem to be there. Continued viability after you’ve left the company and ability to hit profitability highs tomorrow is very important.
As such, if your company has these glaring circumstances then it’s a high-risk business, either or both of them; you can be sure selling it to a potential buyer will require a little hard work and tact.
But there’s more. A number of reasons could make your business high-risk and hard to find a worthy buyer, which might not be related to your industry per-se, but you as an individual.
The future of the business once you’re gone
What will happen once you’ve sold the business and you’re out of the picture? This is a very important question to ask yourself way before you think about selling your business. Every potential buyer will also have it in mind. It will definitely crop up during any deliberations.
As a business owner, you could probably be the nucleus of the firm that nothing can happen if you’re away. Sometimes, very few business owners are able to leave their trades to their employees or delegate duties but have to do everything themselves. For some companies, it’s the owner’s talent, unique skill or rare knowledge that keeps it together. With the structure and organization of the business not done carefully, it becomes really hard to operate without the owner.
As such, do consider your business a high risk undertaking if it cannot or has never run successfully whenever you were away for any reason whatsoever. If you haven’t really started formulating and inculcating a culture of delegating duties and ensuring processes, duties, practices and systems actually run smoothly without you then you probably should start right away before you think about selling.
Any potential business purchaser will think twice before taking over or even considering a business that depends on you for its survival. In fact, those potential buyers who might want to make any deal at this time will make the worst offers you probably wouldn’t like at all.
Big issues/carelessness with your financials
More than any other area in your business the financial statements, processes and all documentation will come into massive scrutiny when you decide to let the investment go. If you believe you’re not ready for such scrutiny it might be a better idea to put off any thought of selling your business. Otherwise, it could project a negative picture to the potential purchaser.
How are your financial statements kept? Are you proud of the documentation, digitally or otherwise? Do you just use mere tools on Microsoft Office to create your invoices, financial reports and statements? Note that this doesn’t really show much professionalism or that you really take your finances or your business with the seriousness they deserve. To most potential company buyers who’ve been around for a while they don’t even look genuine due to the ease of manipulation.
Essentially, a prospective investor worth their weight in every way would expect you to have installed or to be using reputable, trustworthy and efficient accounting tools and systems like QuickBooks or other. With proper, verifiable and well-kept financials courtesy of a reputable software you would be silently shouting to the potential buyer that your business isn’t a financial high-risk and you take it really serious.
At the same time, a high-risk business is one that lacks proper internal financial control processes that can be seen and verified. To the potential business buyer, your finances could have already been manipulated, laden with mistakes or exposed to fraud even without your knowledge. You should ensure financial processes, tools and systems are clear as well as installing the best internal accounting control measures around.
Even better, a business that has established accounting establishments doing its financial documentation, reports, audits and statements isn’t really a high risk one. Accounting tools are important and good to have but a respectable accounting firm handling the accounting matters of the business takes your worth in the eyes of any potential investor a notch higher.
Every little matter that would make it a risky investment would have been seen early in the day by the owner. At that point when you decide to sell your business all professionally produced accounting documents, audited and properly reviewed, will make every claim about your company’s worth credible; takes away the fear of doctored financials and careless financial reporting.
Zero difference between a company and owner’s private life
If it’s hard to differentiate your private or personal life with your business you should expect any prospective buyer to consider it a high-risk undertaking. Note that no one really wants anything to do with the owner or his personal life and their only interest is the company, its profitability now and in the future and how sound it’s as an investment.
Many owners actually go wrong when their personal needs and expenses and those of the establishment cannot be distinguished apart or the owner has developed a habit of mixing both blatantly. Essentially, right from the beginning it pays to guarantee that the business has its own individual and unique accounts very different from personal accounts. Every potential buyer would want to see this way before the beginning of any deliberations.
There’re also prospective investors who might come into the business to observe or investigate how the owner’s family treat the business and whether their personal lives collide with the interest of the business. It’s highly important, if you haven’t already, to ensure that the personal lives of family or even your own, don’t show up or materialize in the affairs of running the business. Any potential buyer would feel it and observe it right away from afar.
Less customers yet lots of income and profit
You might expect that because you’re making a lot of money with so few repeat customers or individual client accounts your investment isn’t a high risk one. This is not always the case. Any business that seems to have very few numbers of customers bringing in the most profit and income to the business could actually not be a wise investment for the future in the eyes of most prospective buyers. High concentration of clients isn’t always good.
The potential purchaser will definitely see your ability to concentrate on a small number of clients without a problem and therein lays the problem. To a potential investor these are clear red marks that might hold back their investment hand. Since your establishment has a few and probably countable clients only, it has a diminishing value. As such, it can be a risky investment for anyone and you must do more to avert this.
For instance, you might want to diversify what you offer and show your ability to deal with more customers. Clearly display that the business’s overall value doesn’t come from a small number of clients. At the end of it all you will have a stable, reputable, successful investment anyone will salivate to own or invest in.
Weak investment without much value
A high-risk business shows a lot of weaknesses and not the easiest to defend. For instance, any business whose ideas, products, customer loyalty, characteristics like customer experience and services hardly have a long shelf-life or do not add value to the user or enhance the life of the buyer will not cut. Establishments that hardly show these characteristics but struggle in most of these areas aren’t really what most prospective investors would choose.
They could even ascertain the company’s weakness in these areas and refuse further engagement and move their attention to another business. If you have a great company that doesn’t enhance the life of the user or add any value in their life or easy to clone with a short lifespan, your investment is definitely a high-risk for any investor. Prospective buyers are looking forward to making money years and decades later when you are out of the picture.
Lacks recurring income sources
Recurring revenue is very important. It’s most likely the reason why most potential buyers choose certain businesses to purchases and not others. What most buyers don’t know is that most investors prefer establishments with recurring source of revenue rather than huge project-businesses with single hefty revenues and then silence, before the next big project comes on board.
A business that has revenue coming in from diverse sources mean the trend will remain the same. One-time types of commodities don’t make the best businesses to purchase as the owner most likely is always out there in search of new clients and after ways of improving the revenue of the company.
In case your business seems this way you might want to think about restructuring its processes and operations to diversify and find other recurring techniques of bringing in more money. For instance, if you run a software company that has to be activated by a shipped package in a CD form, you might want to create a subscription type of framework where some of the applications and tools are accessible on a monthly or annual fee. It might not pick up fast for the first few months but after that the revenue stream will never stop coming in. In the process, your company will increase in value and selling it at a great price will be the easiest thing.
Apart from these reasons that could make any business a high-risk endeavor for any business buyer, there are those that most banks have already labeled as high risk.
- Businesses running commodities with extended chargeback time frames, including any industry known for its ever increasing chargebacks such as a Hemp business, Forex, web-based gambling, tourism and hospitality, online dating to pharmaceuticals, among others.
- Businesses that already have a problem with their reputation, whether they bring in big revenues or not, such as tobacco, electronic cigarettes, adult content-based businesses, among others.
- Conclusion that as per the financial statements and records of the business, including credit history the company is unable to meet its financial obligations or seems to barely survive.
- Your business is involved in some of the most expensive products or services on earth, such as luxury sport cars, expensive jewelry and automotive spare parts, among others.
Even so, you can still sell your high-risk business but need to strategize and come up with diverse smart ways of making it irresistible to a prospective buyer.
These include incorporating:
Irresistible Inducements: When you offer an incentive it doesn’t mean your business is weak but actually making it easy to sell and irresistible to just pass. Even a potential buyer who would have just ignored the business due to its high-risk industry might take a second look, which might be all you need to persuade them. It shouldn’t look like you’re tempting anyone to purchase but actually doing the potential buyer a favor.
Offer partial ownership: As indicated, a high-risk business can be as a result of so many reasons. Even so, you still can make money out of it by offering different ways of investing in the company rather than complete ownership. You could even come up with rent-to-own proposal where the prospective owner can have the business for a specific time-frame and only pay rent before a complete takeover after an agreed space of time. With time, the potential will understand the business, its challenges and strengths and better ways of maximizing on it prior to completely injecting it with more investment funds. As such, the business won’t look like a high-risk investment after all. At times, all a buyer needs is to see how a company works before they make their move.
Decrease asking price: Sometimes even high-risk businesses attract potential buyers ready to own them. However, an asking rate might crop up as a deterrent to a quick takeover that you’re seeking. Lowering it could really help at such a juncture.
Related: How to Set a Reasonable Asking Price
Sweeten the deal with add-ons: it’s also possible that the potential buyer is willing to continue with the sale process but somehow feel they are paying more for less. If you’ve an add-on you could use to make the deal irresistible go for it, such as a piece of land, machinery, company equipment, training for specific staff members, among others.
Include specific pluses: Related to the other points, offering a perk a potential buyer cannot say not really works fine, a unique type of plus for the prospective investor to help them continue with operations flawlessly even with looming changes in management. This includes such pluses as agricultural products for a week or month for a grocery chain, beverage delivery for a fortnight or month-long meat products for a supermarket. Considering the potential buyer will continue keeping the business doors open and making money seamlessly as the company changes hands due an access to raw materials and customers, they would definitely consider the pluses.
The bottom line:
High-risk businesses exist. They will be there no matter the period we are in history. Also, any business or industry can be high-risk for any potential investor. To easily sell your high-risk business, consider ensuring that the deal doesn’t look flat and unexciting, but irresistible and lucrative. Make the potential buyer feel he will be losing something if he were to let it go.
More on the topic: Small Business Risk Management Guide