5 Risks of Selling a business

Posted on 16 Jan 2023, by admin

5 Risks of Selling a business

What are the risk of selling a business?

Selling a business can be a complex and challenging process, and it is important to be aware of the potential risks involved in order to make informed decisions and mitigate potential problems.

1. Undervaluation

One of the main risks of selling a business is the risk of undervaluation.

This can happen when a business owner does not have a clear understanding of the true value of their company, or when they are too eager to sell and accept an offer that is lower than the business is worth.

To avoid this risk, it is important for business owners to conduct a thorough valuation of their company before putting it on the market, and to work with a professional advisor who has experience in valuing and selling businesses.

At Dexterity Partners this is part of our “Fit to Sell” and “Fit for the Future” process, at the very beginning stages of the process we make sure that business owners and ourselves understand completely not only what the value of the business ios but also what are the value drivers, What is it about the business that makes it special, what does it have that makes it unique and thus what makes it valuable beyond the pure numbers. We offer a Free Business Valuation and Advisory Consultation service, get in touch to find out more.

2. Lack of understanding and poor communication

Another risk is the risk of the buyer changing their mind towards the end of the process. This can happen when a business owner agrees to a sale and signs Heads of terms, but the buyer later realises that the business is not as profitable or successful as they had thought, and they do not go through with the purchase.

To mitigate this risk, it is important for the buyer and the seller to have open and honest communication throughout the sales process, and for the buyer to thoroughly investigate the business and its financials before making an offer. The simple fact is that the buyers will undertake thorough due diligence of the business they are buying before the SPA is signed and as such everything will come to light a t some point in the process.

Therefore it is key that both parties are open and honest with each other as otherwise you end up in a situation where deal breaking information starts coming out at the end of the process and both parties having put a lot of time, effort and money into the process end up with the deal falling through and neither party getting what they want.

3. Confidentiality

Another risk to consider is the risk of confidentiality breaches, when sensitive business information is shared with potential buyers and not kept confidential this may lead to the erosion of competitive advantages and loss of business opportunities.

To mitigate this risk, it is important to have a legal Non-disclosure agreement (NDA) in place before sharing sensitive business information and also be selective with who you share the information with.

4. Legal disputes

Another risk is the risk of legal disputes which may arise after the sale of the business, disputes over the terms of the sale or over the representations made by the seller can be costly and time-consuming.

To mitigate this risk, it is important to have a clear and detailed sale and purchase agreement in place that spells out the terms and conditions of the sale, and includes any warranties or representations made by the seller. Also, it’s vital to work with experienced legal professionals throughout the process, who can review and advise on the sale agreement and help to minimise the risk of legal disputes. This is one area where whilst there can never be a 100% elimination of any potential issues, having a good legal team advising and taking the necessary steps can go a long way to reducing the risks significantly.

At Dexterity Partners the legal team is uniquely involved from day one in every deal we do. We have seen first hand how leaving the legal advisers out of the loop until the very end of the process when they come to draft the SPA can often be so detrimental to the deal. BY including them from the start we ensure that all the risks from a legal perspective are addressed from the start and measures put in place and the deal is structured in ways that stop many of the the issues that can often appear ever arising.

5. The personal and emotional factors

Finally, it is important to note that selling a business can also have emotional and personal risks for the owner. The process of selling a business can be stressful and emotional, and it can be difficult for a business owner to let go of a company that they have worked hard to build and grow.

To mitigate this risk, it is important for business owners to have a clear understanding of their reasons for selling and to work with a professional advisor who can help them navigate the emotional aspects of the process. Many of the business owners we come across have spent a huge part of their life devoted to their business and the decision to sell is potentially the biggest business decision of their lives.

We understand that the decision to get the sale process underway is not a 2 minute one, and we want to make sure that in every deal we do the seller is not only making the right choice but that they are ready to make it. After all if the business owner is not 100% sure that the time is right to sell then the chances of a sale falling through halfway the process or them regretting it post sale are considerable risks and one that you do not want to be in

In summary, selling a business can be a complex and challenging process that involves a number of risks, including undervaluation, confidentiality breaches, legal disputes, and emotional and personal risks. By being aware of these risks and taking steps to mitigate them, business owners can increase their chances of both a successful sale in financial terms but also a successful sale in personal terms.

For further information and impartial advice, feel free to contact our founders at Dexterity Partners