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Not knowing your S.P.O.F.s (single points of failure), having out of date contracts, cooking the books, unprotected intellectual property and owning a business that’s too dependent on you are just some of the reasons why 70% of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…
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.
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…
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 seminars 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.