Selling a business is tough, but even tougher when a buyer(s) seems obsessed with analyzing risk that in the seller’s mind may be immaterial.  Owner/Operators and management teams are often so familiar with the business, its operations, and the market, that they can become immune, and sometimes complacent, to the inherent risks that may be deeply embedded in the business. 

A new owner or potential buyer needs time to understand and assess those embedded risks and the strategies they can use to mitigate them or they will simply discount their offer to cover their perceived downside risk.

Of course, when the buyer is intimately familiar with the industry, the ability to understand and assess those embedded risks will be a lot easier.  However, even when a buyer has experience in the industry, they are starting from a point of fear – fear they will make a disastrous acquisition that will haunt them for years.  Meanwhile, the seller is starting from a point of comfort with those same risks.  Same facts but with a vastly different viewpoint!

The fear of loss is a powerful human emotion.  One simply needs to look at what happens in the stock market when overall sentiment changes from greed to fear.  Studies have shown that fear of losing money is much stronger than the desire to make money.  Sellers need to understand this basic human reality before they begin negotiating a sale of their business.

Add to this, that buyers also tend to be hesitant to accept or at least somewhat skeptical of the business’s upside potential.  No wonder so many M&A discussions go nowhere!

So how does a seller prepare, knowing that most buyers will focus on the risks and be skeptical of the upside potential; the balance of which will be reflected in an offer.

The first step is to objectively identify the inherent risk in all aspects of the business: operations, suppliers, human resources, customers, etc.  Just because something has not happened in the past, does not mean that it can not happen in the future.  Buyers will not place much weight on that argument.

Starting with the top line, what are the risks associated with the market you participate in and the customers you serve.  Are there steps you can take to mitigate the potential for customer defection, even if no one is leaving?  Can you demonstrate customer loyalty with more than simply pointing to historical sales, with tools like Net Promoter Scores?  Are there strategies you can deploy to make customers stickier?

On the operations side, are your operating procedures up to date and relevant?  Can they be effectively used to train new staff when employees leave, even if you believe they will stay until retirement?  Do they incorporate the latest and best practices for safety, regulatory compliance, and quality control?

Risks that buyers may perceive around sales employees or key management defection can be mitigated with stay bonuses or other incentive structures.

Are there new suppliers that you need to bring in as backup or are current supplier contracts in need of a revisit?

It is important to understand that by being flexible on the deal structure, you can help alleviate the concerns buyers have about the risks associated with buying the business.  Being open to an equity roll, vendor take-back, or earnout, for example, will demonstrate confidence in the existing business and its operations, but will have the added value in that it demonstrates confidence in its future as well.
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When the buyer perceives the seller wants to “run for the hills”, it can be extremely difficult to capture true value.

One important aspect impacting the value of a business is its customer quality: an important component of a business’s revenue quality.  High-quality revenue is generally considered to be sales that are sustainable, predictable, and profitable and thereby reduce the risk for any new owner or management team.

While customer concentration levels (eg: the percentage of business coming from top customers) and customer churn rates (loyalty) are normally assessed by potential buyers, the true value of a business’s customer quality is often poorly articulated by sellers and thereby risks not being not fully reflected in an offer.  Just because you can point to some blue-chip, well-paying, loyal customers, doesn't mean a buyer is going to pay an above-market premium for the business.

However, whenever you can demonstrate a track record, with hard data, on the actions you have taken to improve customer quality and its impact on bottom-line results, you are much more likely to have potential buyers pay higher multiples.  And even if you're not a seller, who doesn't want higher-quality customers to grow and simultaneously build resiliency into the business.

Traditional tools like Net Promoter Score (NPS), Customer Experience Management (CXM), and Customer Relationship Management (CRM) can be useful ways to measure and guide management on initiatives that improve customer quality.  However, often you may need to go much further.  It means moving from data and information, to intelligent insight, to actions, to results.

As an example, I recently spoke to the owner of a fast-growing natural foods business.  With detailed data on sales per point of distribution, he was able to show, for his business, the difference in quality between customers even when purchasing similar amounts of product each year.  He knew exactly when to double down on successful product launches with one customer and when to back off and ride out the relationship with other customers.  It was a matter of focusing his efforts where he got the best results with insights from robust data.  In another example, a business services company was able to demonstrate the actions they took with specific customers to drive the percentage of sales as recurring contracted revenue.

There are numerous advanced tools available to business owners to measure and monitor important intent and sentiment data about your market, business, products, etc. across internal systems such as your CRM and outside sources such as social media.  Many of these tools are now using advanced analytics, artificial intelligence, and big data to provide insights not available to business owners only a few short years ago.

The key is to find the right tool(s) for your business to help your sales and marketing teams expand and grow your base of high-quality accounts.
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Bottom line, being able to use data to demonstrate the quality of your customers, along with the strategic initiatives you undertake to improve customer quality, can translate into higher valuations.