How to "De-Risk" Your Business Financially Before Selling

You spent decades building your business. Now, as retirement approaches, you want to sell it for maximum value. Understanding how to "de-risk" your business financially before selling can mean the difference between a smooth transition and a disappointing outcome.

Buyers scrutinize risk. They review your financial records, customer relationships, and operational systems. The more risk they see, the less they offer. To address these concerns, take the following steps before listing your business.

Clean Up Your Financial Records

Organize your books now. Buyers want three to five years of clean statements with consistent revenue, healthy margins, and accurate expense tracking. Hire a CPA to audit and fix discrepancies. Missing receipts, personal expenses in business accounts, and unclear revenue sources raise red flags.

Document everything. Create a clear paper trail for major transactions. Explain any unusual expenses or revenue fluctuations. Even small issues, such as mistakes when ordering custom cups, should be properly documented and explained.

Diversify Your Customer Base

Relying on one or two major clients creates risk. Buyers worry that these customers might leave after the sale. Spread your revenue across multiple clients. No single customer should represent more than 15% of your total revenue.

Build long-term contracts where possible. Signed agreements with renewal clauses give buyers confidence. They see predictable income instead of uncertainty.

Reduce Your Personal Involvement

Buyers prefer businesses that operate without the owner’s constant presence. Document processes, train your team for daily operations, and establish standard procedures for key tasks. Build a management team that can operate independently.

Step back gradually. Let your managers make decisions. This proves the business can thrive without you.

Strengthen Legal Protections

Review all contracts with a lawyer. Update vendor agreements, employee contracts, and lease terms. Address any pending litigation or disputes. Buyers will discover these issues during due diligence. Resolve them first.

Protect your intellectual property. Register trademarks, update copyrights, and secure patents. These assets add value and reduce legal risk.

Address Operational Weaknesses

Fix broken systems before you sell. Upgrade outdated technology, repair equipment, and streamline inefficient processes. Buyers discount their offers when they spot operational problems. By proactively addressing risks in these key areas, you'll be well-positioned for a successful sale.

The work you do now to "de-risk" your business financially before selling pays off at closing. You command a higher price, attract better buyers, and can retire with confidence. Start this process at least two years before your planned sale date. Your future self will thank you.

4 Tips To Help You Determine the Value of Your Business

You’ve worked hard building your business to be what it is today, whether you’ve started from the ground up or had a transfer of power. 

We know that every step has taken an incredible amount of work, and now you find yourself trying to determine how much all that value translates monetarily. Let’s take a look at a few essential tips to help you determine the value of your business.

Review Your Financial Statements

The first step in assessing the value of your business is to take a close look at your financial statements. These documents give you a clear picture of your business’s financial health.

Start with your profit and loss statement to understand your revenue, expenses, and overall profitability. Next, review your balance sheet, as it outlines your assets, liabilities, and equity, giving you an overall snapshot of what your business owns versus what it owes.

Don’t overlook your cash flow statement—it illustrates how cash moves in and out of your business, which is crucial for understanding your day-to-day operations. For example, a business showing consistent year-over-year revenue growth with stable cash flow is far more attractive to potential buyers.

Identify and Calculate the Value of Your Tangible and Intangible Assets

Your business is more than just its physical assets, like equipment, inventory, or real estate. It’s also the value of your intangible assets that plays a significant role in valuation. Tangible assets are straightforward to calculate—what is the current market value of the items your business owns?

Intangible assets, on the other hand, can include things like your brand reputation, intellectual property, or a loyal customer base. For instance, a small, family-owned bakery with high-quality equipment and a well-recognized name in the community will likely have both tangible and intangible value to consider.

Research Market Trends and Compare Your Business

The next step is to see how your business fits into the broader market landscape. Research trends within your industry to understand how businesses like yours are currently performing. Look at companies of a similar size and type to determine how they’re priced.

Imagine you own a landscaping business—analyzing what other successful businesses with similar services are selling for can give you a better sense of where your business stands. 

This market comparison is essential for gauging how attractive your business might be to potential buyers within the current economic climate, which is critical if you want to sell your business when you retire.

Determine an Earnings Multiple

Valuing businesses often involves using an earnings multiple, which varies across industries. You can apply this multiple to your business’s profits to calculate its estimated market value. 

If your industry averages a multiple of three times earnings and your annual profit is $200,000, your business may be worth around $600,000. 

Growth potential and risk factors also influence this number—businesses with higher growth prospects or lower perceived risks tend to justify higher multiples.

Determining the value of your business helps you understand the legacy you’ve built and the impact it has made. Armed with the right tools and insights, you can approach this process with clarity and confidence, ensuring that you account for every aspect of your hard work.