People

Do you have any family members working in your company? Are your key employees willing to stay after the sale? 

These and other people-related issues constitute another primary aspect of risk – and therefore value – during the sale of a business.

Ownership

If more than one owner is actively working in your company, a buyer will need to replace all owners unless the owners are willing to stay with the business long-term. This significantly increases risk for the buyer and will result in a lower purchase price. The advantage of having only one active owner in your business is that the buyer only needs to replace one person – the active owner. The fewer individuals the buyer must replace after the closing, the lower the risk is for the buyer. As a result, a higher purchase price can be justified.

Is your reason for selling your business non-urgent? Ideally, all owners should be healthy and otherwise not have a pressing need to bail. If the sale is urgent, and the buyer knows it, the value may decrease.

Are all owners receiving a salary? If you’re working 80 hours a week, it’s unlikely that one salaried manager could replace you. Because of that, a deduction must be made from EBITDA to replace you with two employees. Consequently, the value of your business will be less.

If your company isn’t heavily dependent on you, this reduces risk for the buyer and greatly improves the marketability and attractiveness of your business – and consequently its value. If your business is dependent on you, the buyer will consider this risky and be willing to pay a lower multiple than if it were not.

Family

Family members actively working in your business can pose a risk factor to the buyer because they will likely need to be replaced after the sale. The buyer may consider it excessively risky to attempt to replace these employees while also closing on the transaction. Having any non-working family members on your payroll also complicates due diligence and represents additional risk to the buyer, which will negatively impact the value of your company.

Management Team

How strong is your management team? Do they have a solid track record of achieving results? Do you have a trained and experienced management team in place? If so, the value of your business will be higher as more buyers are willing to make an acquisition with fewer people they need to replace post-closing. If your business has a strong management team, this increases the universe of potential buyers you can market your business to, thereby improving the odds of a successful sale. 

Key Employees

Is your business highly dependent on any employees? Businesses that aren’t highly dependent on key employees are far more attractive to both sophisticated and unsophisticated buyers because it reduces risk for the buyer. 

If any essential employees are unwilling to stay, a buyer will consider this risky. If some of your employees are difficult to replace, a buyer may consider the acquisition of your business too risky if they believe key employees may not be retained after the closing. Key employees may find out about the sale and threaten to leave, which could both kill the transaction and damage the value of your business.

Are non-solicitation or non-compete agreements in place with key employees? If so, this reduces risk for the buyer and increases the value of your business.

Compensation

Are wages above or below industry averages? If wages are lower than average, a buyer will need to increase compensation, which will decrease the cash flow of the business, and, subsequently, its value.

Tenure

What is your employee turnover rate, and how does it compare to industry benchmarks? If your employee tenure is longer than average, this reduces risk for the buyer and improves the attractiveness of your business. 

Be sure to compare your company’s turnover rate with businesses similar to yours. There can be a wide disparity in tenure among different sectors. In recent years, for example, the national average for total separations hovered around 20%, according to the U.S. Mercer Turnover Survey. While the retail and wholesale category exhibited the highest turnover at about 60%, most other industries were at or below 20%. Geography also makes a difference. Turnover tends to be the highest in the South and the lowest in the Northeast.

If the tenure of your employees is shorter than average in your industry, this increases risk for the buyer and reduces the attractiveness of your business. A shorter tenure, or high turnover, could signal problems with your corporate culture. If the buyer is concerned about the culture of your company, this can dramatically reduce the value of your business in the buyer’s eyes.

The fewer people the buyer must replace after the closing, the lower the risk is for the buyer.