Buyers and sellers face different but complementary risks when a business changes hands. Before the sale, the primary risk to the seller is not realizing the full value of their business. After the sale, the seller risks the buyer failing to fulfill post-sale obligations, like earnouts and financing. In addition, the seller risks reputational damage and disappointment if the new owner takes the business in the wrong direction.
On the other hand, the buyer’s risks are overpaying, not recognizing hidden liabilities, and not managing their new investment to its maximum value.
Both parties navigate the transaction with uncertainty from opposite ends of the timeline and value equation. This article summarizes the different personal, financial, legal, operational, and transaction risks to the buyer and the seller and highlights the important role professional exit advisors play in the process.
Steps the Buyer and Seller Can Take to Reduce Their Risk
The sale of a business involves a minefield of potential risks for both the buyer and seller.
A business owner can minimize risk when selling their business by preparing thorough documentation, structuring the deal wisely, protecting the company’s confidential information, reducing legal liabilities, conducting pre-sale due diligence, engaging with advisors early, and planning for their post-sale transition.
The buyer can minimize their risk by engaging with expert advisors, conducting rigorous due diligence, validating the assumptions supporting the business valuation, negotiating the best possible deal, protecting against fraudulent representations, and understanding the regulatory and tax implications of the transaction to ensure a smooth transition plan.
| Only 20% to 30% of businesses that go to market actually sell. |
Even if the buyer has an attractive business, good financial records, and a fair valuation, problems like business owner dependency, financing challenges, market forces, and other factors can lead to an unsuccessful outcome. These odds highlight the importance of professional assistance and comprehensive exit planning to help ensure a successful transaction.
How Do Exit Advisors Minimize Buyer and Seller Risk?
In conjunction with other professional advisors, Certified Business Exit Consultants (CBECs®) strategically minimize personal, business, and transaction risks during a business exit. These advisors are trained to integrate legal, financial, personal, business, and other aspects of the exit process to protect an owner’s interests and maximize their exit.
These same professional advisors, however, can also work with a buyer to provide critical insights that help avoid costly mistakes, ensure compliance, and maximize the buyer’s value.
Here is how exit advisors, accountants, attorneys, financial planners, and other advisors mitigate risk to buyers and sellers.
| Nearly 48% of business owners aiming to sell have no formal exit strategy. |
The Role of the Certified Business Exit Consultant (CBEC®)
Ideally, the exit process begins when a seller engages with a Certified Business Exit Consultant (CBEC®) to create a formal exit plan. Certified exit advisors are critical in de-risking the entire exit process by preparing the business, the owner, and the exit advisory team for a smooth, strategic, and financially sound transition. They serve as the integrator by working with other advisors to help align all moving parts and resolve problems before they occur.
The CBEC’s objective is to help the owner create a holistic exit strategy that aligns personal and business goals while addressing possible financial, legal, tax, valuation, and transaction risks, to help guide the business owner to the best exit for that owner. Using structured assessments, such as business readiness assessments and owner mental & financial readiness assessments developed by the International Exit Planning Association (IEPA), a CBEC® can identify and address many of the buyer’s risks before the due diligence process begins. In addition, the certified exit advisor can further reduce the seller’s risk by helping the business owner create a business succession plan, business value acceleration plan, and business continuity plan.
The Exit Advisory Team
Concurrent with the exit advisor’s consultations, the advisors are also working to minimize the client’s risk. Sellers can take several steps to reduce potential risk during the exit planning process, especially concerning their financial, legal, operational, and transactional exposure. Similarly, a buyer’s advisors can help protect them from the risks connected with the purchase.
Certified Public Accountant (CPA)
CPAs minimize negotiation, financial, and tax-related risks by conducting due diligence to identify red flags, normalize earnings, verify the accuracy of projections and financial statements, and ensure the sustainability of earnings.
In addition, these financial advisors help structure the deal for tax efficiency, perform pre-sale tax planning, calculate and minimize tax liabilities, support valuation and negotiation, and prepare for post-sale financial management.
CPAs also collaborate with legal and advisory teams by coordinating with attorneys on indemnification provisions, escrow amounts, and warranties, and supporting investment bankers or brokers with financial data needed for marketing and negotiations.
When representing the buyer, CPAs verify the financial health of the possible acquisition and uncover hidden risks. CPAs help buyers by verifying liabilities, revenues, and profits and analyzing key metrics like EBITA, working capital, cash flow, and debt.
They can also reveal potential red flags with receivables over 90 days, off-balance sheet liabilities, the accuracy and sustainability of earnings, goodwill allocations, step-ups in basis, and future deductions. After the sale, CPAs can help buyers integrate the new company into their financial reporting system and assist with new entity setup or post-acquisition restructuring.
Attorney
Attorneys help sellers by educating clients about risk, coordinating with other advisors, and proactively identifying and resolving legal red flags to prevent future claims or deal delays.
They draft risk-shielding agreements like purchase agreements, indemnification provisions, escrows, holdbacks, and earn-out clauses. Attorneys also protect confidentiality and intellectual property, safeguarding a company from HR and employment risk.
During the transaction phase, attorneys advise on deal structure, guide on corporate restructuring, manage regulatory & compliance issues, and prepare post-closing agreements.
When representing the buyer, attorneys investigate corporate structure, ownership, liabilities, pending litigation, IP rights, contracts, employment agreements, compliance, tax exposure, and recommend protecting the buyer.
Certified Financial Planner (CFP®)
Certified Financial Planners (CFPs®) and other wealth advisors reduce exit planning risk by focusing on the seller’s personal financial well-being before, during, and after the business exit. They ensure that the seller’s financial goals are met, that the sale proceeds are used efficiently, and that the exit aligns with the seller’s long-term life planning.
CFPs® minimize risk by ensuring the seller’s exit strategy meets their personal financial goals, conducting pre-transaction tax and wealth planning, and providing post-sale wealth management and estate planning to ensure a financially comfortable retirement.
These wealth advisors coordinate with the exit team, ensuring that all recommendations are integrated into the seller’s personal wealth plan and helping the seller evaluate deal structure trade-offs.
Although they are not experts in business valuation, deal structuring, or operational or industry analyses, wealth advisors can assist buyers by providing cash flow and budget planning, risk management, tax strategy, and post-sale personal financial and estate planning.
Other Potential Advisors
Investment Bankers, Private Equity Groups (PEGs), and M&A Advisors play distinct but complementary roles in reducing risks because of their specialized experience. They can ensure successful deals at impressive valuations because of their business model and the number of interested buyers they can bring.
Insurance agents can help mitigate risks to buyers and sellers in many ways. For instance, they can reduce:
- Leadership risks – with key person life insurance;
- Operational risk – by recommending proper business & general liability post-sale;
- Cyber and data risk – with a cyber audit & cyber insurance; and
- Legal and contractual risk – using representations & warranty insurance.
Other experts who could have a seat at the table to reduce transaction risk are business brokers, business valuation experts, real estate appraisers, and HR consultants.
Buyers and sellers face significant risks during a business sale, ranging from inaccurate valuations to legal liabilities, undisclosed debts, post-sale integration challenges, and unmet expectations. These risks can lead to financial loss, legal disputes, operational disruptions, and other problems if not effectively managed.
Engaging with experienced professionals, such as certified exit advisors, CPAs, attorneys, wealth advisors, business brokers, et al., can reduce business exit risks by ensuring thorough due diligence, accurate valuation, proper legal documentation, business and personal financial counseling, and sound strategic advice. With the guidance from these experts, buyers and sellers can navigate the complexities of the transaction with clarity, confidence, and protection, leading to smoother and more successful business transactions.
Master Exit Strategy Development with CBEC® Certification
With IEPA’s CBEC® certification, you’ll gain the knowledge and practical experience to offer business owners the expertise they need when it matters most.
Here’s why it’s the right fit for you:
Proven, Practitioner-Led Training: Learn from experts who’ve successfully navigated the exit planning process.
Focused on Results: As per our findings, 66% of CBEC-certified advisors structure their engagements in multiple phases, ensuring they deliver long-term value.
Relevant for All Business Sizes: According to our research, over 2/3 of advisors place 50% or more of their business in the Main Street and Middle Market categories.
Attractive Earning Potential: Our studies show that 22% of CBEC advisors earned over $250,000 from exit planning services in 2024.
Hands-On Experience: Complete a real exit plan with a business owner to earn your CBEC®—practical experience that sets you apart.
Don’t just discuss exit planning; become the professional who makes it happen.
Join the CBEC® Spring Session Today
| About the Author:
James J. Talerico, Jr., CMC ® CBEC ® is an award-winning author, speaker, and nationally recognized small to mid-sized (SMB) business expert, with outstanding business consulting, succession planning, value acceleration, and exit planning credentials. He is the owner of Greater Prairie Business Consulting, Inc. (www.greaterprairiebusinessconsulting.com) located in Irving, Texas and has helped thousands of business owners throughout the US and in Canada maximize their business performance and exits for more than 30 years. Jim currently sits on the IEPA’s Education Committee. |
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