15 June, 2011

Private business exit: Q5. Who are your key people, customers, suppliers and partners?

Continuing our series of questions to help you plan the sale of your business, what I’d like to ask you next is “Who are your key people, customers, suppliers and partners; and are you vulnerable to their departure?”

Is there anyone who is vital to the business because of their knowledge, relationships, etc? What about you? Or key sales people, or engineers, or a buyer, say? I’d probably avoid tying a key employee into an unusual special contract. That’s for the buyer to offer if they so choose. A special deal may even lower the business value. But can and should you build up other people to share the work and spread the risk?

One tricky issue I’ve seen in two otherwise very good businesses I’ve considered buying is religion: staff who are all members of a particular religious sect, and likely to leave en masse  (and likely set up in competition) if the buyer isn’t also in the sect. I didn’t buy those businesses, and politely suggested to the owners that they needed to fix the problem if they couldn’t arrange a management buy-out.

In business-to-business relationships, being heavily dependent on just one or two customers, suppliers or channel partners can definitely make your business harder to sell (having said that, good franchises are not so much of an issue). I was offered a business once based on a single brand of imported clothing, with nothing to protect the business from the supplier cutting off supply or setting up in competition. I turned it down, and a year later, the supplier did both, effectively wiping the business out overnight. I was also offered a business which rented heavy machinery to infrastructure firms, but 90% of its business was with one customer, and no firm contracts. It ended up being sold to a competitor for break-up value (even less than book asset value).

Good contracts can improve the business appeal, and poor contracts can lessen it. Sometimes there’s nothing you can do about the problem, and you then have to figure out for whom it’s least likely to be a problem.

First posted August 1st, 2008

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