Last time on the Growth to Exit® Blog, we talked about the Five Key Areas in your company that buyers evaluate and scrutinize. Flaws and problems in any of these areas can impede the value of your business and result in a reduced offer from the buyer, who will need to spend extra money and time to fix these issues. To be sustainable, you must implement best practices, processes and systems in these five critical areas.
As a reminder, the five keys areas include:
Let’s look at the Legal Area and examine the risks involved when selling a business.
Selling your business can be a bittersweet time. You have finally found an offer that satisfies you, but the company you have helped build for so many years, the company you have poured your heart and soul into, no longer belongs to you.
Although you are not the owner anymore, and you have one less thing to worry about, selling your company comes along with various risks. One of your main considerations should be to look at your best practices inside conflict and risk management.
Why is Risk Management important?
Risk management helps companies identify operational, legal and procedural risks and reduce them through preventive measures. When best practices, processes and procedures are employed inside a company, they increase the likelihood of success and scalability of a service or product
The intensive examination of corporate risks is not only important for the smooth operation of a business, but also for its sale and change of ownership. Addressing risks, systematically reducing them and following best practices has proved to be an effective way of increasing the value of a company, and simultaneously the offers buyers put on it.
Risk management also includes looking at the opportunity side. It is not only a question of avoiding risks, but also, above all, of identifying opportunities. This makes risk management a driver of in-house innovation and continuous improvement.
Gaining Insight on Risk Management
The starting point for risk management in many companies is the development and adoption of a risk guideline that sets out the frame for which areas need to be examined.
A methodical review of the lawsuits, claims and potential claims can yield a ripe crop of insights. If the claims or litigation seem to arise out of a contract term, for example, then a legal review of that clause and the risk it is supposed to reduce should be made. If the non-competition clauses in salespeople’s contracts are generating claims, an experienced employment lawyer should look at the particular business environment and whether the non-compete clause is too restrictive.
A complete examination of the insurance coverages, policies and risk assessment is essential to anticipate objections from a potential buyer. If there are gaps in coverage or the policies are not adequate for the potential risk, for example, a buyer may decrease the value he places on your company.
These are just a few examples of what could be off-putting to a buyer. Even though your company may be quite successful and profitable, problems in conflicts or risk management will look much different to an outside investor, as their confidence in the viability of the company after the sale is a crucial factor for the decision to purchase or not.
The Bottom Line
For risk management and all related measures to be effective, they first need to be integrated into an organization, while risk culture has to be anchored within the institution. At the same time processes for identifying, assessing and managing risks need to be defined, regardless of whether a company is just starting or it is about to be sold.
A potential buyer will look for best practices inside your company, especially in the area of conflict and risk management. Some red flags to an interested buyer include:
It makes economic sense to address any underlying issues now to identify the cause of the litigation, so that best practices can be embedded. Analysis of the insurance coverage, risk evaluation and potential liability assessment should also be performed, so that issues may be addressed and resolved.
It also goes without saying that without proper legal protection, you stand to lose the real value of your business and possibly more. It is always advised to consult with your legal counsel to determine which kind of protections are best for your unique situation in order to minimize the risk of financial loss.
It takes strategic, methodical action and intentional focus to groom a company to receive the highest valuation. Conflict and risk management are just one crucial area that must be examined to ensure that best practices are in place that minimize the risk and potential exposure of the company.
Next time at the Growth to Exit® Blog we will talk about the second of the 5 Key Areas, the Human Capital.
Your company is the product. Growth to Exit® is the process. The Buyer is your customer.
THIS INFORMATION IS FOR GENERAL INFORMATION ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE AND DOES NOT NECESSARILY REFLECT THE OPINIONS OF TSG PUBLISHING. YOU SHOULD NOT ACT ON INFORMATION RECEIVED FROM GROWTH TO EXIT® WITHOUT FIRST SEEKING ADVICE FROM YOUR LEGAL COUNSEL.