**Episode 6 of the Business Growth and Exit Strategies Podcast**
The biggest valuation haircut usually comes from the risks you do not even realize you are broadcasting.
When someone does due diligence on your business, they take a fine-tooth comb to your processes and procedures—or lack of them. It illuminates issues inside your business, organization, or practice.
This can be a test run to figure out what you can do to get more valuation for your company. The maximum multiple.
## Buyers Discount Uncertainty, Not Just Problems
Buyers do not just discount what is bad. They discount what is uncertain.
They might look and say: over here, there are a couple of SOPs we need to fix. No big deal.
But uncertainty in the sales process? That is a ding. Uncertainty about the hiring process and where all the HR documents are? Another ding.
If the valuation for your company is $1 million, a $10,000 hit here and a $50,000 hit there can lead to a 20% discount on your business.
## The Buyer’s Lens
Buyers underwrite downside first: continuity, control, and verification. Then they decide what multiple your cash flow deserves.
They go in asking: where is the uncertainty? Where is the current owner or management team falling down?
Here is what you need to know: they will get those dings fixed. They will fix all those dings and dents in three to six months and double or triple the profitability of the company.
Sometimes it is because they know where to look. Sometimes it is because they can say: things have changed, management has changed, ownership has changed, these are the new rules.
If you do not want to change the rules now, somebody is going to come in, do what needs to be done, and profit off what you did not do. You end up with a discount.
## What Feels Normal Reads as Risk
What feels normal inside the business—the workarounds, the heroics, the informal approvals—reads as uncontrolled variance to a buyer.
There is a dial, and they are twisting it. If there are too many variances, they may say: we are going to pass for right now. There are probably three or four things you could fix, and we would love to talk to you in a year.
It may delay your plans. You may still get the exit, but it may delay it.
The question is: why can you not do this now? What is preventing you? Who is preventing you? Sometimes it is a who—could be multiple people—and that requires tough conversations.
## Revenue Fragility Signals
Signals that buyers spot:
– Concentration—not enough clients
– One manager that approves everything
– One vendor that cannot be replaced
– Buyer maps that fail when you try to model them out
Ask yourself: where can these departments run without me? Where are the problems? Where are the blind spots?
## The Red Team Exercise
One way to find issues is a red team exercise.
Go into a department and say: the manager is not going to show up for a week. What problems are we going to run into? What about two weeks?
Replace manager with owner, supervisor, whatever term applies. What happens if they cannot fulfill their role? What fails first?
People will know the first three, four, and five really quick. Take notes. Fix them.
But the next four or five are just as important. You have to figure out what problems to fix so you can walk away free and clear.
## Documentation Gaps
Look for:
– Where are there no SOPs?
– Where are SOPs old and need updating?
– Is there reporting cadence?
– Does somebody talk to the manager or supervisor every day, every week, every month?
– Who answers to who?
– Are all the contracts turned in?
– Is there visibility into what is being done?
– Are forecasts accurate?
If someone needs to be there driving decisions the entire time, and it is founder-led or owner-led, that is a problem.
When an investor or private equity group buys a founder-led business, they go to the market to find the best talent to replace you. Whether you do it or not, they are going to do it. Why not benefit from doing it yourself?
## Client Retention Risks
It is not just about having one pool of buyers. It is:
– Weak renewal processes (monthly recurring revenue, year-long contracts)
– Undocumented success playbooks
– Support signals that risk churn
– Poor Net Promoter Scores
Some departments could have an 8, 9, or 10 NPS. Other departments might have a 1, 2, 3, or 4. That is a problem.
## How Buyers Price Uncertainty
When buyers price uncertainty, it is typically aggressive. It is:
– Huge haircuts
– Holdbacks
– Money in escrow
– Earn-outs
– Longer due diligence
– Tighter reps and warranties (sometimes called a “basket”)
## Turn Invisible Risk Into Visible Control
Instead of saying “trust me,” have:
– KPIs
– Cadence
– SOPs
– Decision bands
– Decision rights
Show that the organization is managed the way it should be.
## Action Framework
Run a buyer risk audit this week. Look for points of failure in each department.
Start with highest and best use of time. What gives you the biggest win? It may not be the department that needs it most first.
Get a quick win. Get the team involved.
Look for:
– Concentration issues (employees who alone can perform a task, clients who alone pay the bills)
– Undocumented processes
– Inconsistent reporting
– Key person dependencies
Put a whiteboard somewhere. List the items to fix.
Pick the one risk any buyer could find in 10 minutes. Document it, fix it, assign an owner, assign a metric, and prove it is controlled before you go to sell.
—
📊 **Free Framework Assessments:**
– [SELL Framework (Revenue Quality)](https://scottsylvanbell.com/sell-framework)
– [SCALE Framework (Operational Readiness)](https://scottsylvanbell.com/scale-framework)
– [DRIVER Test (Execution Capability)](https://scottsylvanbell.com/driver-test)
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Full transcripts:
The biggest valuation haircut usually comes from the risks you don’t even realize you’re broadcasting. When someone comes in to do due diligence on your business, they’re going to take a fine-tooth comb to your processes, procedures—or lack of them. They’re going to uncover issues inside your business, organization, or practice. This can actually be a test run for you to figure out what you can do to get more valuation for your company, to achieve the maximum multiple.
Buyers don’t discount what’s bad. They discount what’s uncertain. They may look and say, “There are a couple of SOPs we need to fix. No big deal.” But uncertainty in the sales process? That’s a ding. Uncertainty around the hiring process or missing HR documentation? That’s another ding.
Let’s say the valuation for the company is a million dollars. A $10,000 hit here, a $50,000 hit there, and as you go through the process, it can easily lead to a 20% discount on your business.
You have to understand the buyer’s lens. Buyers underwrite downside first: continuity, control, and verification. Then they decide what multiple your cash flow deserves. They’re going to look for uncertainty in the business. Where is the current owner or management team falling down?
Here’s what’s important to know: once they identify those dings and dents, they’ll fix them. In three to six months, they may double or triple the profitability of the company. Sometimes it’s because they know where to look. Sometimes it’s because they can say, “Things have changed. Management has changed. Ownership has changed. These are the rules now.”
If you don’t want to change the rules or strengthen the foundation, someone else will come in and do what needs to be done. They’ll profit from what you didn’t do, and you’ll take the discount.
What feels normal inside your business—workarounds, heroics, informal approvals—reads as uncontrolled variance to a buyer. They’re turning the dials, asking, “Is this a good company?” If there are too many variances, they may pass and say, “Fix three or four of these things and we’ll talk in a year.” You may still be profitable, but your plans could be delayed.
So the question is: why can’t you do this now? What’s preventing you from moving forward? Sometimes it’s a “who.” It may require tough conversations, and not everyone wants to have them.
If revenue is fragile, buyers will spot the signals immediately: concentration risk, too few clients, one manager approving everything, one vendor that can’t be replaced. They’ll model out scenarios and see where things fail.
Ask yourself: where can these departments run without me? Where are the problems, blind spots, and issues?
One way to test this is with a red-team exercise. Go into a department and say, “The manager isn’t showing up for a week. What breaks?” Then make it two weeks. Replace “manager” with owner or supervisor. What fails first?
People will quickly identify the first three to five issues. That’s good—take notes and fix them. But the next four or five issues are just as important, if not more important. You need to uncover the deeper problems in the organization and processes so you can eventually walk away free and clear.
Look at documentation gaps. Where are there no SOPs? Where are they outdated? Is there a reporting cadence? Who answers to whom? Is your organization chart clear? Is the paperwork in order? Are contracts complete? Is there visibility into what’s being done in each department?
Are your forecasts accurate? If you say this quarter will hit $250,000 in a department, how close do you get without heavy oversight? Does someone need to be driving decisions constantly? If it’s founder- or owner-led at every turn, that’s a problem.
When private equity or another investment group buys a founder-led business, they go to the market to find the best talent to replace the owner. Whether you choose to do it or not, the new ownership will. So why not benefit from making those changes yourself before you sell?
Client retention risk isn’t just about having one pool of buyers. It’s weak renewal processes for monthly recurring revenue or annual contracts. It’s undocumented success playbooks. It’s poor support signals or low Net Promoter Scores.
When you look under the hood, some departments might score eight, nine, or ten, while support or operations might score one, two, or three. That’s a problem.
When buyers price uncertainty, they’re aggressive. You’ll see holdbacks, escrow, earnouts, longer due diligence, and tighter reps and warranties.
A holdback means you were going to get $10 million, but they set $1 million aside. You receive $9 million, and the rest is held in escrow.
An earnout means the metrics you projected must be hit. If you said a department would generate $1 million in revenue, you’d better hit it, or you could lose $50,000 or $100,000. These mechanisms protect the buyer from uncertainty.
What you want to do is turn invisible risk into visible control. Instead of saying, “Trust me,” you show KPIs, reporting cadence, SOPs, decision rights, and clear accountability. You demonstrate that the organization is managed the way it should be.
Run a buyer risk audit this week. Look for points of failure in each department. Start with the highest and best use of time—the area that gives you the biggest win. It may not be the department that needs the most help, but getting a quick win builds momentum.
Document processes. Test your SOPs. Refine them. Look for concentration issues—whether it’s employees who are the only ones who can perform a task or clients who represent too much revenue. Identify undocumented processes, inconsistent reporting, and key person dependencies. Start fixing them.
Put a whiteboard up and list the items that need to be addressed. Pick the one risk any buyer could find in 10 minutes and get to work. Document it. Fix it. Assign an owner. Assign a metric. Prove it’s controlled before you go to sell.