Published on 10/05/2023 by John Rigby, Business Advisor, Sell Abusiness.Com.Au

Mitigating Risk When Buying a Business

Mark Zuckerberg, the founder of Facebook once said "The only strategy that is guaranteed to fail is not taking risks." It comes with the territory and it takes a certain type of person to succeed.

I've sold literally hundreds of businesses in the last 23 years – many of the buyers are still running very successful businesses today. The key is to identify risk, and how to mitigate it.

Here's five strategies that will really help you:

1. Find the best type of businesses to buy

Find an industry that you like, even remotely. If you're just doing it for the money, you may well fail. You're going to invest a lot of time and money in your business, so it needs to be fun and rewarding too. People call me and I ask them what they are looking for? The answer is often "I want to make money". The response needs to go much deeper than just making money, in fact many successful owners I deal with never talk about the money. The opportunities in business are endless but in an ever changing world (and the pandemic changed things forever) the two categories I'd be looking to invest in to mitigate risk are:

• Businesses with subscription/recurring revenue
• Asset light businesses that don't require large plant and equipment/heavy machinery costs

1. The Buyer Doesn't Know What The Seller Knows

When owners are planning to sell their business they often attempt to drive sales and growth. Bigger is always better, right? I'd suggest rapid growth, or big swings in revenue (up and down) is not an attraction. Look for businesses with a history of stable revenue and profits year on year and beware of fluctuations.

1. Identify Key Person Issues

Key people are those that a business can't afford to lose tomorrow. So the first thing to do is to find out who they are (if any). Key people can include:

• Chief Executive Officers & Chief Financial Officers
• Employees with an indispensable skill set unique to the business
• Owners, partners and founders with a high equity stake
• Emerging younger employees making their way up the ladder

How key people manifests risk in a business can vary – for example:

• The CFO suddenly passes away while negotiating re-funding expansion
• Your top sales producer has been injured and is out of action for months
• A skilled employee leaves and opens a business in competition to you
• Your Business Development Leader gets head hunted and takes a job elsewhere

There's no one strategy relating to key people and mitigating risk:

• Protect the company with life insurance and disability policies for key people
• Health benefits reducing the risk of serious illness
• The work culture can be a bit of a cliche' but it can make a difference in how heavily (or otherwise) a business relies on key people.

1. What Defensive Qualities Does the Business Have?

Defensive qualities deal with the businesses ability to be resilient to economic downturns and recession. The more defensive a business appears, the more attractive they are to investors looking for a lucrative investment opportunity with minimal risk.

These types of businesses usually deal in essentials and necessity goods that consumers need regardless of economic conditions – things like healthcare, insurance, and food.

In assessing a businesses defensive qualities and subsequent risk consider:

• Does the business produce or service an essential service industry?
• How resilient is the business to a recession or economic downturn?
• How volatile is the industry the businesses operates in?
• Is the business producing long term stable financial returns?

1. Find Out What The Seller Really Wants To Do

Many business owners who are looking to sell their business call their accountant to discuss options. The advice is usually, sell the business, pay the tax, put what's left into superannuation and make some investments. There's nothing fundamentally wrong with this strategy but its not the only one.

In terms of risk, buyers need to realise the seller knows a lot more about the business than they do – and sometimes sellers are looking to scale back rather than sell out altogether. Often sellers are attracted to retaining a percentage of the business because the returns of retaining say 30% of the business are better than investing that 30% into shares or other investments.

Owners can also have a significant personal attachment to their business which they've created and grown, and they want to stay involved in some capacity for a period. Having the seller stay in the business provides the buyer with enormous confidence and comfort in knowing that the seller believes in the business enough to stick around.

Full sellouts are still common where the seller agrees to stay in for an agreed period to ensure a smooth transition, but sales of 70-80% with the seller retaining 20% are common where the financial returns and tax savings are better than selling 100%.

Looking for a risk mitigating business? Find the one that's right for you here.

Author: John Rigby is a Business Advisor with sellAbusiness in Queensland. For more advice on selling or buying a business, contact John here.

John Rigby, Business Advisor, sellAbusiness.com.au

Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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