8 Ways to Mitigate Risk When Selling Your Company

If you’re a business owner, risk likely is often top of mind. But it should come into pinpoint focus when you’re thinking about selling your company—a complex process with its own potential problems that can scuttle the deal if you’re not proactive in managing the risks. Below are eight ways you can mitigate risk during the sale process, ensuring a smooth and profitable transaction.

1. Get a Proper Valuation

When you’re thinking about selling your business, establishing its value is the crucial first step. An accurate valuation not only sets realistic expectations but also ensures you achieve the highest possible price. Otherwise, you risk underselling and walking away with far less than your business is worth.

A proper valuation examines multiple factors, including your company’s financial performance, customer and vendor concentrations, and current market conditions. Gaining this insight will align your expectations with market realities and determine the optimal timing for the sale. It’s better to confront any discrepancies between your desired sale price and the actual market value early on than to be surprised later in the process.

Before hiring an investment banker to determine the value of your business, ask for a preliminary valuation to get a snapshot of your business’s worth and highlight key areas that need attention. A preliminary valuation can provide valuable market insights and identify potential buyers, helping you assess whether they’re the right fit for your company’s future.

A proper valuation empowers you to enter the market with confidence, knowing that you’re positioned to secure a fair price for your business. Don’t leave money on the table—make sure your business is accurately valued before you sell.

2. Perform Thorough Due Diligence

Once you’ve received your valuation, the next crucial step is performing thorough due diligence—an in-depth review of all relevant financial and legal documents, including contracts, licenses, permits, and tax returns, to ensure everything is in order before you engage with potential buyers. Uncovering and addressing any issues at the start will save time and prevent complications down the line that could jeopardize your deal.

To get a clear picture of your company’s true profitability, which may differ from your initial perception, consider also commissioning a quality of earnings (QoE) review from an accounting firm. Typically, a prospective buyer will conduct this review several months into the sale process, after securing exclusivity. However, discovering a gap between perceived and actual profitability at this late stage can lead to buyer disappointment and a reduced purchase price. By proactively conducting a QoE review, you can mitigate this risk by establishing a shared understanding of your company’s financial health from the start.

Determining your company’s true profitability and collecting all the necessary documentation will position you to achieve the best possible outcome in your sale.

3. Execute Confidentiality Agreements

As you move forward in the sale process, securing confidentiality agreements with potential buyers is a critical step in protecting your business’s sensitive information and maintaining its reputation, morale, and customer base. Without a robust confidentiality agreement in place, you risk leaks that could damage your business’s standing and disrupt operations.

Share information only with potential acquirers who have signed your confidentiality agreement, and even then, reserve sensitive details for those who have demonstrated serious interest in the transaction. A well-drafted agreement, created with the assistance of your attorney and investment banker, will provide the necessary legal protections to safeguard your business. The agreement should clearly outline the terms for sharing information and include provisions that protect your interests if confidentiality is breached.

Putting confidentiality agreements in place before discussions begin allows you to engage with potential buyers confidently, knowing that your business’s reputation and customer relationships are protected.

4. Control Document Access During Due Diligence

Building on the protection offered by confidentiality agreements, data rooms—secure digital platforms that allow controlled sharing of sensitive documents—provide an essential layer of security during the sale process. Features like watermarks track document access, helping you to quickly identify any breaches and maintain the integrity of your data. Even if confidentiality is compromised, your information remains safeguarded.

The use of data rooms is crucial for both you as the seller and your prospective buyers, as it reduces the risk of unauthorized disclosure. This controlled environment not only streamlines the due diligence process but also reinforces the confidentiality measures already in place. By using data rooms throughout the sale process, your business can protect its most valuable information, ensuring that sensitive details are shared only with serious and authorized parties.

5. Meet Potential Acquirers

Selling your business isn’t just about getting the best price; it’s also about ensuring the buyer is the right fit for your company’s future. Once you’ve received bids for your company, plan to meet with potential acquirers before moving forward. These management meetings allow both parties to assess compatibility and determine whether the partnership will work after the transaction closes.

Before signing a letter of intent (LOI), take the time to interview each buyer’s references, including representatives from companies the buyer has previously acquired, which will give you a clearer picture of the buyer’s integrity. Did they adhere to the terms outlined in the LOI? How did they handle any issues that arose post-transaction? The answers to these questions, along with your impressions from the meetings, are critical to making an informed decision for your company.

Selling your company is a once-in-a-lifetime event, so choosing the right buyer is paramount. By thoroughly evaluating potential acquirers through meetings and reference checks, you can mitigate the risk of selling to someone who may not be suitable and set up a smoother, more successful transaction.

6. Negotiate a Letter of Intent

When drafting an LOI, stand firm on the most important aspects of your purchase agreement. While not every term needs to be negotiated at this stage, addressing key elements such as purchase price, indemnification levels, escrows, rep and warranty insurance, working capital, and any contingencies up front will help set clear expectations and facilitate a smooth transaction.

Rep and warranty insurance is a valuable tool that can limit your risk after the sale. By providing the buyer with a higher level of coverage while typically capping your exposure at 50% of the retention, it reduces the likelihood of post-sale claims, offering peace of mind once the transaction is complete.

The LOI phase is also when you have the most leverage, so it’s important to use it wisely. Ask bidders to provide comments on the purchase agreement as part of their LOI submission; these comments can help you identify and resolve any potential issues early, minimizing the risk of misunderstandings later in the process.

7. Design an Optimal Deal Structure

When selling your business, structuring the deal to maximize cash up front while minimizing liabilities is vital. Key elements like tax implications, payment terms, and managing liabilities significantly impact the final outcome. With an optimal deal structure, you can reduce the need for large escrows or deferred payments—and walk away with more cash in hand.

Investment bankers specialize in customizing deal structures that align with your objectives, carefully managing aspects like indemnification levels and leveraging tools such as rep and warranty insurance. By meticulously negotiating terms, an investment banker can limit your post-sale liabilities, minimize the amount of money tied up in escrow, and increase your immediate access to the sale proceeds.

This tailored approach contrasts with the generic, one-size-fits-all methods that might leave you with less cash up front and more exposure to future claims. Choosing the right investment banker will ensure that every aspect of the deal is aligned with your goals, maximizing the value you receive while safeguarding your interests.

8. Engage Experienced M&A Professionals

Successfully selling your business hinges on effective timeline management and seamless legal coordination. Delays can be costly, and prolonged transactions may lead to lost opportunities or diminished value. Maintaining momentum in the sale process is crucial, and professional expertise makes a significant difference.

A good investment banker will identify any problems or risks built into the deal while also helping you seek out potential buyers, negotiate sale terms, and manage the transaction process. An experienced mergers and acquisitions (M&A) attorney will help you review legal documents, draft the purchase agreement, and comply with relevant laws and regulations. And a skilled accountant can help you evaluate financial statements and analyze the tax implications of the sale for an optimal transaction.

Engaging a team of experienced M&A professionals from the outset is the most critical step in minimizing risk. A seasoned investment banker, an experienced M&A attorney, and an expert accountant collectively bring the knowledge, contacts, and expertise necessary to navigate the sale process successfully. The guidance from your M&A team will be invaluable in avoiding delays, managing legal complexities, and ensuring your transaction is structured in the most tax-efficient way possible. Learn more about the transaction professionals and what they cost.

Achieving Your Goal: A Lucrative, Low-Risk Sale

Selling a business is a complex process filled with potential risks. By following these eight strategies—obtaining a proper valuation, conducting thorough due diligence, securing confidentiality agreements, controlling document access, meeting potential acquirers, negotiating a detailed LOI, structuring the deal optimally, and engaging experienced professionals—you can mitigate these risks and achieve a successful transaction.

PCE has a long history of helping sellers attain the maximum value and secure the right buyers for their companies with minimal risk. If you have any questions about how to limit risk when selling your business, please contact us. We’re happy to provide additional suggestions to ensure the successful sale of your company.