How to Identify your S.P.O.F.s (Single Points Of Failure) if you’re Selling a Company
We’ve had lots of questions following our blog Top 5 pitfalls to avoid when selling a business. In it, we identified some of the vulnerabilities that could stop you selling a company successfully – and for optimum value. As corporate finance experts, we’ve met so many entrepreneurs who’ve said, “If only I’d thought about these things before I tried to sell my business.”
Not knowing your S.P.O.F.s (single points of failure), having out of date contracts, cooking the books, unprotected intellectual property and owning a business that’s too dependent on you are just some of the reasons why 70% of business owners fail to sell first time.
In the first of a new blog series on dealing with these challenges, we’re taking a closer look at S.P.O.F.s (single points of failure) and how you can better manage them as you get exit ready.
Our popular eBook How to Avoid the Pitfalls When Selling a Business defines S.P.O.F.s as follows:
“When a buyer reviews your business, they look for single points of failure. These are areas in your business that are high risk and could negatively impact your business if they failed.”
Let’s consider 3 common S.P.O.F.s and what to do about them…
Suppliers
Do you get all your key products, components or services from a single source? There is nothing better than having a great relationship with your suppliers – these connections are precious and can be a large part of what has made you successful. However, do you have a plan B if they were to go bust or be bought by your competitor? What if external factors were to affect the supply chain?
For example, if you have a supplier who makes moulded products for you, do you own the tooling and could you access it independently? If not, how easy would it be to move it to another supplier?
When you’re selling a company – or even if you’re not – sit down with your supplier and ask them, “What happens if…?” Look at alternative supply options and spend some time researching the market to identify other potential sources and how feasibly and quickly you could switch.
Then, create a written contingency plan, mapping out alternative options for supply. Keep this plan up to date to show potential acquirers.
Employees
Your people are your power, so think about how much would it impact your company if one of your key employees left tomorrow. The impact could be felt in a matter of weeks, days or even hours, depending on what your business does.
Every employee contributes something integral to the business – be it highly niche skills, talented leadership, or pure ‘manpower’ to get vital everyday jobs done. So, you need to show potential buyers that you have considered the impact of their departure – or even their long-term absence.
You can encourage people to stay with your company with incentive schemes and loyalty bonuses, but life happens, and people move on or need time off for health-related reasons.
Ideally, you’d have two people for every role in your business to mitigate this risk. However, in smaller businesses this isn’t always financially feasible. Instead, we recommend you train others within your organisation on business-critical tasks by allowing them to shadow key roles, especially those involving key client relationships.
Always document key roles too. Write a manual with processes that will help you to induct a new member of staff into that role quickly, in a way that doesn’t impact your clients and customers.
Chances are, your business employs salespeople, so always make sure they are using a CRM (customer relationship management) system and that they update it. What you don’t want is to pay them for 5 years… and then they take all the contacts and pipeline with them and move to your competitor! If you have a written manual on the role of the salesperson along with a data base of prospects on your CRM, it will be so much easier for you, your new salesperson and/or your acquirer to stay connected with those clients…
Clients
One of the primary features any potential buyer will evaluate before they decide whether to buy your company is your client base. They will be looking at all types of customer – potential, current and retained business – and so will their lender (if they’re looking to borrow funds to buy you).
Ask yourself if you have your eggs in too few baskets with your customers? No matter how well you know them and how many years they’ve been buying from you or using your services, if they are limited in number then there is a big risk to your profits if they decide to go elsewhere, or their circumstances change, or if they close their business.
Where you are heavily dependent on one or two clients, you can reduce the risk factor by asking larger customers to sign longer-term agreements – and buyers love contracted revenue.
Potential buyers could get nervous if they see that a lot of your business relies on you. They will be wondering how many customers will stay on the books after you exit. To alleviate their worries, you may be asked to be retained on a consultancy basis to transition the client relationship or exit gradually so there is ample time to handover the relationship. That way, your customers will also be reassured and more likely to continue doing business with the new owner.
A small pool of customers is not just a risk for a buyer it’s a risk for your business today, so whether you are selling now or in the future – make a plan to address it. Find ways to dilute the dependency on those clients by winning new business or growing smaller accounts.
What are YOUR S.P.O.F.s?
This blog is by no means an exhaustive list of S.P.O.F.s. Can you think of others in your business? It is imperative that you identify them and tackle them before you put your business on the market. If you don’t, your potential buyer and their advisors will, and it could mean you don’t achieve the best possible sale – or are even unable to sell at all.
Remember, every business is different, and you should always seek professional advice on your unique situation.
Entrepreneurs Hub is an approachable corporate finance company helping business owners across the UK to prepare and sell a business – the smart way. Find out more about our free webinars on preparing and selling a company for maximum value, or contact us in confidence discuss your situation, receive a guide valuation, and find out how saleable your business is.
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FAQs – Selling Your Company
How do I sell my business in the UK?
Selling a business in the UK typically involves preparing financial information, obtaining a valuation, identifying suitable buyers and negotiating the terms of a sale. Most owners work with an M&A adviser to manage the process confidentially, approach qualified buyers and maximise the value achieved.
At Entrepreneurs Hub, we talk about five key areas that make the difference between success and failure when selling your business. Read more…
What is my business worth?
A business is typically valued by applying a multiple to its sustainable profit, often EBITDA or adjusted net profit. The appropriate multiple depends on factors including growth, recurring revenue, customer concentration, management strength, owner dependency, market conditions and buyer demand.
Determining what your business is worth involves more than applying a simple formula. Use our Business Valuation Calculator to obtain an initial valuation range, or read our simple business valuation guide to understand the factors buyers consider.
How long does it take to sell a business?
Selling a business in the UK typically takes around 12 to 18 months from initial preparation to completion, although some transactions may be quicker or take longer. The timeline depends on business readiness, buyer demand, deal complexity, due diligence and how quickly the legal terms can be agreed.
Preparing accurate financial information and organising key documents in advance can help reduce avoidable delays. Read our complete business sale timeline to understand what happens at each stage.
When is the best time to sell a business?
The best time to sell a business is usually when it is performing strongly, its future growth is clear and you are not under pressure to complete a sale. Buyers are generally more attracted to businesses with rising or stable profits, reliable financial information and credible opportunities for further growth.
Business owners are often in a stronger position when:
- Revenue and profits are growing or consistently strong
- Financial records are accurate and up to date
- Future growth opportunities can be clearly demonstrated
- The business is not overly dependent on the owner
- There is a capable management team in place
- The owner has started preparing well in advance
Market conditions can also affect buyer appetite and valuation. Factors such as sector growth, access to finance and competition between buyers may support stronger deal activity, but preparation and business performance are usually more important than trying to identify a perfect month to sell.
Ultimately, the best time to sell is when both you and the business are ready, and the company can demonstrate sustainable performance and future value to potential buyers.
Use our Exit Readiness Tool to assess how prepared your business is, or read our guide on when to sell your business for further guidance.
Do I need an adviser to sell my business?
You are not legally required to use an adviser to sell your business, but many owners appoint an experienced M&A adviser to help manage the process. An adviser can prepare the business for sale, identify and approach suitable buyers confidentially, coordinate negotiations and support the transaction through due diligence.
The right adviser can also help create competitive tension, protect your time and reduce the risk of avoidable mistakes. Read our guide to choosing the right business sale adviser to understand the different types of support available.
How do I prepare my business for sale?
Preparing a business for sale involves strengthening its financial performance, reducing risk and making sure it can operate successfully without heavy reliance on the owner. Buyers will also expect accurate financial records, clear contracts, organised documentation and evidence of future growth.
Preparation should ideally begin well before approaching the market, giving you time to address weaknesses that could affect value or delay the transaction. Use our Exit Readiness Tool to assess how prepared your business currently is.
How is confidentiality protected during a sale?
Confidentiality is protected through controlled information sharing, anonymised buyer approaches and non-disclosure agreements. Potential buyers usually receive limited information at the start of the process and must sign an NDA before commercially sensitive details are released.
Prospective buyers should be assessed before receiving further information, with documents shared gradually according to their level of interest and credibility. A well-managed process also allows the business owner to retain oversight of who is approached and what information is disclosed.
What documents do I need to sell my business?
The documents needed to sell a business commonly include financial accounts, management information, forecasts, customer and supplier contracts, employment records, tax information and evidence of intellectual property ownership.
Buyers may also request details of property, insurance, legal disputes, regulatory matters and company ownership. Organising this information before due diligence begins can reduce delays and help maintain buyer confidence. Our Business Sale Due Diligence Checklist explains the main information buyers are likely to request.
What’s the quickest way to sell a company?
Selling a business quickly is possible, but speed shouldn’t come at the expense of value or deal security Read more…
What’s the best way to sell a business online?
Yes, you absolutely can sell a business online. Many platforms specialise in connecting business sellers with buyers. Read more…
How can I increase the value of my business before selling?
You may be able to increase the value of your business by improving sustainable profits, developing recurring revenue and reducing reliance on individual customers or the owner. Buyers also value capable management teams, reliable financial reporting, scalable operations and clear opportunities for future growth.
The earlier you identify the factors affecting value, the more time you have to make meaningful improvements. Use our Business Valuation Calculator for an initial indication of value and our Exit Readiness Tool to identify areas that may need attention.