Business sales – attributes and barriers – contracts and flexibility
My second blog in this series on business sales looks at the flexibility of your business and its dependence on customers or suppliers prior to a business sale and the possible impact on its marketability.
Contracts and flexibility
Is your business totally flexible and able to adapt to every change in the market? Can you cut your costs or decline business where it meets your business needs or capacity issues with no penalty? This sounds like a useful attribute; however, such flexibility tends to mean there is no contract in place or such flexibility is available to both contract parties.
The risk of not having a contract in place, or working on ‘gentlemen’s agreements’ is that, whilst you ‘know’ the business is good and is going to continue for as long as you want it, there is no reassurance to the buyer that the business will continue.
Where contracts with your customers help to establish ongoing trade, it is also important to ensure your supply side is supported with the correct level of certainty. Buyers often look for certainty in supply to ensure they can continue to operate and meet demands, however they will also want the flexibility to negotiate prices or change supplier, especially where a buyer may have increased purchasing power or are able to supply items themselves.
Lease agreements for business properties are an important consideration. If the lease is too long or restrictive it can impact upon buyers’ perception of value, especially where they may have existing premises that could be used. However, where no lease is in place there is the risk that the business may be made homeless or unfavourable variations to the current arrangement may be forced upon the new owners.
Each business is unique, as is each potential buyer. If you would like to discuss your current business arrangements and how to prepare for an eventual business sale we would be happy to discuss your specific circumstances further.
Dependence on limited customers or suppliers
Does your business rely on one or two key customers or suppliers? Do you have a strong working relationship with these key customers and suppliers?
It can be useful to demonstrate a strong relationship with your customers and suppliers, however if you have a very limited number of customers or suppliers there is an element of risk of ‘putting all of your eggs in one basket’. Conversely if you have no repeat customers or regular suppliers there is likely to be concern over the reliability of future activity.
There is no magic number of customer or suppliers, each business will have differing profiles however it is generally accepted that having only one or two customers presents a higher risk profile than having multiple customers.
This blog forms part of a comprehensive whitepaper on ‘Selling a Business‘ written by the Corporate Finance team at Ensors.