How do I reduce risks to the buyer?

Really smart buyers purchase companies that are efficiently operated and are prepared for a new owner. By TOM McKASKILL.

By Tom McKaskill

Many business owners rush around cutting expenses and pushing revenue generating activities just before a sale of the business in order to pump up the profits.

Their objective is to increase the valuation at the time of sale, however they neglect to reduce the risks in the business for the buyer, which often negates all their efforts.

Smart buyers anticipate problems in an acquisition and set out to find them before they agree to buy and set a final purchase offer.

They are looking at three areas of risk: inherent problems within the business, problems which they will encounter on integrating the acquired business into their existing activities, and constraints that will prevent them from achieving their target return on investment.

In order to protect the value in your business, these are areas that you need to address in preparing the business for sale.

Any corporation that has undertaken a number of acquisitions will probably have made mistakes, and almost certainly will have acquisitions that failed to provide them with the anticipated benefits.

They have been burned, probably more than once, and so they are looking for problems.

They will have a very long due diligence checklist of all the things that their accountants and lawyers tell them to watch out for, and they will have their own experiences that will add to the list.

They will sniff out every discrepancy, irregularity, missing information, potential liability and risk they can before they agree to move forward.

Any extensive due diligence process takes time, uses up administrative resources and creates stress and disruption. It distracts senior managers from running the business and takes attention away from running the business. If the investigation uncovers problems, it normally leads to a reduction in the offer price and more delays as the due diligence is extended.

The only way to counter this negative impact on your sales price is to be fully prepared for due diligence. Probably the best preparation is to have your own accountants and lawyers undertake a vendor due diligence.

This will examine your business through the eyes of a buyer and point out to you where changes are required. Once you have implemented those changes, keep your due diligence files up to date and your performance and governance systems working properly so you will be ready for the buyer due diligence.

Also, think about how your business might be integrated with that of the buyer and what you can do to ease that path. Using standard industry contracts, documenting processes, ensuring the key employees are retained and putting in a succession plan are some of the activities you might undertake.

Next, think about how the buyer will operate your business after the sale and put in place systems and processes which will make managing the business easier for the new owner.

Really smart buyers purchase companies that are efficiently operated and are prepared for a new owner. The new owner can then concentrate on generating profits instead of fixing problems.