Risk management is a term that business owners hear frequently. Their relationships with their customers, their employees and their suppliers can all be affected by the risks they take, and those they don’t.
When it comes time to sell, the owner is faced with a whole new set of risks. Managing these risks can take many different forms.
Initially, one of the biggest risks they face is ensuring they get a fair price. However, often more important is collecting the balance of the sale.
Properly structuring debt service in a business transaction is paramount. An improperly structured transaction can create problems for the buyer and seller years after the sale. Too much debt or too short of a term on the note can negatively affect the buyer’s cash flow and chances of success.
I recently sold to a local retailer who added a couple of years to the buyer’s note to ensure a steady flow of profits. The seller’s tradeoff was a greater amount of money during the length of the note and a sense of security.
From a seller’s perspective, it is imperative that the buyer invests a significant amount of capital into the transaction.
Although it sounds trite, the buyer of a large business I sold earlier this year has more than one million reasons to make sure that he’s successful. Plus, a personal guarantee can go a long way in securing the debt.
A seller can further minimize risk by ensuring the business is fundamentally strong. For example, a business that has a good client base, key employers in place and a strong relationship with suppliers will be better prepared to face unexpected challenges.
A couple of months ago, the seller of a service business purposely delayed closing until a key employee returned. I’ve also seen a manufacturing client time the date of close with the signing of a new client’s contract.
In both cases, by helping to maximize the buyer’s success, the sellers minimized their own risk.
Finally, just as a buyer has a choice of whom they sell their business.
Part of this decision should involve a thorough review of the buyer’s credit history, personal financial statement and resume.
I once had three suitors for the same company make similar offers. The seller’s choice was an easy one because of the buyer’s background, experience and financial strength.