5 factors that reduce risk to a buyer

One way to build the value of your business, especially as part of the succession planning process, is to focus on decreasing risk factors that lead potential buyers to expect a higher rate of return on their investment. Here are 5 factors that reduce risk to a buyer and lead to an increase in business value.

1. Stable growth and earnings

A business with large fluctuations in revenue and profitability from year-to-year lacks stability and could scare away potential buyers. Focus on building a steady rate of growth and stabilizing earnings over time to decrease those risks for a potential buyer.

2. Diversity in customers and suppliers

High concentrations of revenue from a single client or purchases from a single vendor represent a risk to your business and decrease its value. You can increase business value by building your customer base to lessen the potential impact of a loss of a major customer or by finding alternative vendors for key materials or supplies.

3. Documented policies and procedures

A potential buyer will pay more for a business that comes with directions on how the business runs than they will for one without those written directions. Documented policies and procedures help keep employees on the same page, lead to increased efficiencies through orderly processes, and increase customer satisfaction by delivering a consistent product and service.

Whether your succession plan includes selling to an outside party, or passing the business to family, documentation makes for a smoother transition.

4. Develop key employees and focus on retention

A business that functions with little owner involvement will be more valuable than a business that requires ownership to make key decisions, or an owner that is the key salesperson or key contact for major customers. Key employees retained through a business transition provide stability for the new ownership and, along with policies and procedures, help to create a turnkey organization. Retain key employees through the use of employment agreements, stock options, or other incentives that vest over time.

5. Intellectual property

Patents, trademarks, and other proprietary information represent some of your strongest competitive advantages against your competition. The protection provided by these intellectual properties guards your business and ensures that competitors cannot easily replicate your product or service, reducing the risk of business lost to competitors.

How DHJJ Can Help

If you have concerns about risks affecting your business value or ways to increase the value of your business, please contact DHJJ's Exit Planning Group at 630-420-1360 or email Nick Brooks at nbrooks@dhjj.com.

DHJJ hosts many events throughout the year on tax, accounting, and business advisory topics. Please visit www.dhjj.com to view upcoming events.

• Nick Brooks is a CPA, CVA with DHJJ in Naperville.