In M&A, every buyer is asking the same question:
“How risky is this business after I buy it?”
No matter how exciting your growth story or how strong your EBITDA, risk shows up as discounts, delays, or deal-killers in the eyes of a buyer.
At Legacy Advisors, we help founders not only maximize value, but de-risk the business well before the LOI. Because risk isn’t just a legal issue — it’s an economic one. And the savviest founders know that the most reliable way to increase valuation is to remove friction from the buying process.
In this article, I’ll break down the most common categories of business risk, how buyers perceive them, and the strategic moves founders can make 12–24 months ahead of exit to proactively reduce those risks — and drive better deal outcomes.
Why Buyers Discount Risk — Even in Healthy Businesses
When buyers price a business, they’re not just buying cash flow — they’re underwriting confidence.
And confidence is inversely proportional to perceived risk.
If a buyer feels:
- Financials are unclear
- Key relationships are fragile
- Systems are manual
- Compliance is questionable
- Knowledge is trapped in the founder’s head
…then even great businesses get hit with:
- Lower EBITDA multiples
- More structure (earnouts, escrows, indemnities)
- Slower diligence
- Higher legal costs
- Delayed or failed closings
Reducing risk isn’t optional — it’s one of the only levers founders truly control before going to market.
The Four Risk Categories That Matter Most
At Legacy Advisors, we organize risk into four categories:
| Risk Type | Buyer Question |
|---|---|
| Financial Risk | Are the numbers accurate and repeatable? |
| Operational Risk | Can this business run without the founder? |
| Customer/Market Risk | Are customers sticky, and is demand predictable? |
| Legal/Compliance Risk | Are there any landmines waiting to explode? |
Let’s walk through each.
1. Financial Risk: From Gut-Driven to Data-Driven
Buyers want to know:
- Are financial statements GAAP-compliant?
- Is revenue recognized properly?
- Are margins consistent and defensible?
- Can KPIs be verified over time?
- Is budgeting tied to forecasted performance?
How to Reduce Financial Risk:
- Shift from cash to accrual accounting (12–24 months pre-exit)
- Standardize KPI tracking (e.g., CAC, LTV, churn, margins)
- Perform internal QofE (Quality of Earnings) before buyer diligence
- Tie forecasts to historicals with commentary
- Eliminate co-mingled expenses and owner discretionary items
As I’ve shared on the Legacy Advisors Podcast (link), the fastest way to lose valuation in diligence is for a buyer to lose faith in your numbers.
2. Operational Risk: Build a Business, Not a Job
Buyers assess:
- Who owns key knowledge?
- How systematized are the processes?
- Can the team execute without the founder?
- Are workflows consistent and documentable?
- Is the leadership team reliable and scalable?
How to Reduce Operational Risk:
- Build SOPs (Standard Operating Procedures) for every critical function
- Promote or hire operational leadership well ahead of exit
- Create accountability frameworks (OKRs or KPIs) across departments
- Automate or document manual workflows
- Reduce day-to-day founder dependence
We often tell founders: if you disappear for 30 days, does the business get stronger, weaker, or stop altogether?
That answer determines how buyers perceive operational risk.
3. Customer and Market Risk: Diversify, Then Strengthen
Buyers dig into:
- Customer concentration (revenue reliance on top clients)
- Contract terms, renewal rates, and churn
- Market size, TAM/SAM, and competitive landscape
- Customer feedback and satisfaction scores
- Historical and forecasted growth per segment
How to Reduce Customer Risk:
- Aim for no more than 15–20% revenue concentration from top 1–2 clients
- Convert large clients from project-based to recurring contracts
- Diversify revenue across industries, geographies, or channels
- Systematically track and report customer satisfaction
- Build a referral pipeline that validates retention and loyalty
At Button Holdings, we often walk away from deals where 50%+ of revenue is tied to one or two relationships. The fragility is just too great.
4. Legal and Compliance Risk: The Silent Deal Killers
Buyers review:
- Contracts (customer, employee, vendor)
- IP ownership and protection
- Regulatory compliance
- Employment law exposure
- Pending or historical litigation
How to Reduce Legal Risk:
- Perform a legal audit 12+ months prior to exit
- Assign all IP formally to the business (especially with contractors)
- Shore up employment agreements and NDAs
- Ensure contracts are signed, updated, and enforceable
- Address any unresolved litigation or tax exposure early
These landmines don’t come up during first meetings — they explode during diligence, right before the finish line.
The Timeline for Risk Reduction
Founders who address risk in advance retain leverage in the deal process. Here’s the cadence we recommend at Legacy Advisors:
| Time to Exit | Action |
|---|---|
| 24 months | Begin documentation cleanup and operational delegation |
| 18 months | Conduct mock diligence (financial, legal, operational) |
| 12 months | Build internal QofE and update all contracts |
| 6 months | Package risk disclosures and mitigation plans |
| LOI signed | Prepare buyer data room with de-risked documentation |
Case Study: Risk Reduction Led to a $5M Higher Close
We worked with a tech-enabled service company with ~$4.5M EBITDA and strong growth. But:
- 42% of revenue came from one client
- The founder was still running daily ops
- Contracts were in Google Docs — unsigned
- Deferred revenue schedules were missing
We spent 12 months:
- Spreading revenue across 8+ clients
- Hiring a COO and empowering department leads
- Formalizing all MSAs and SLAs
- Conducting a third-party QofE
When buyers engaged, the business looked dramatically lower risk — and received 3 competing offers, each above the founder’s target price.
The winning offer came in $5M above expectation.
Strategic Tools for De-Risking Your Business
At Legacy Advisors, we recommend using:
- SWOT + Risk Matrices to map potential vulnerabilities
- OKRs to drive operational alignment
- Customer Cohort Analyses to track retention
- Contract Management Tools to track renewal dates and terms
- KPI Dashboards to detect early signals of drift or disruption
This transforms your business into an investable asset — not just a lifestyle engine.
What We Teach in The Entrepreneur’s Exit Playbook
In The Entrepreneur’s Exit Playbook (available here), Kris and I emphasize:
“The exit process doesn’t reward perfection — it rewards preparation.”
Founders who focus only on revenue and ignore risk assume that buyers will “figure it out.”
They will — and they’ll discount accordingly.
Mindset Shift: From Growth at All Costs to Defensible Value
Founders often chase scale and growth, believing that more top-line automatically equals more exit value.
But the real equation buyers use is:
Enterprise Value = Normalized EBITDA × Confidence Multiplier
Reducing risk increases that multiplier.
Because a $5M EBITDA business with low risk can sell for 10x.
But a $7M EBITDA business with high risk might struggle to get 5x.
Founder Role in Risk Management
Your job isn’t to eliminate every risk — that’s impossible.
Your job is to:
- Identify them
- Acknowledge them
- Build systems to manage and reduce them
- Communicate your strategy to buyers clearly
Risk-aware founders earn respect — and premium valuations.
Final Thoughts
Risk is the silent value eroder in M&A.
It doesn’t always show up in term sheets — but it shows up in:
- Buyer behavior
- Deal structure
- Timeline slippage
- Lower multiples
- More restrictive terms
De-risked businesses close faster, on better terms, with fewer surprises.
And the founders who take risk seriously — early and intentionally — don’t just sell their companies. They command them.
Frequently Asked Questions About How to Strategically Reduce Business Risk Over Time
Why is business risk such a major concern for buyers during M&A?
Because buyers are inheriting more than just your assets — they’re inheriting your liabilities, vulnerabilities, and uncertainty. Business risk signals unpredictability, and unpredictability erodes trust. Even if your EBITDA looks strong, if a buyer sees risk in your contracts, operations, or customer relationships, they’ll either offer a lower price, load the deal with structure (earnouts, escrows), or walk away. As Ed Button, Jr. often explains to Legacy Advisors clients, reducing risk is the fastest way to defend valuation, close deals faster, and keep more money at the table when the transaction is finalized.
What types of business risk do buyers typically focus on?
Buyers generally assess four key areas:
- Financial risk — Are your numbers accurate, GAAP-compliant, and repeatable?
- Operational risk — Can your team execute without the founder’s constant involvement?
- Customer/market risk — Are customers diversified, loyal, and contracted long-term?
- Legal/compliance risk — Are your contracts enforceable, your IP secured, and your practices compliant?
Each category can either inspire buyer confidence or trigger doubt. The more de-risked you are across all four dimensions, the more attractive — and valuable — your business becomes.
How far in advance should I start de-risking my business before selling?
Ideally, 18 to 24 months before a planned exit. That gives you enough time to:
- Systematize operations
- Strengthen your leadership bench
- Diversify customer revenue
- Conduct a mock QofE (Quality of Earnings)
- Formalize contracts and IP assignments
- Resolve any outstanding legal or tax exposures
Starting early gives you the breathing room to fix deeper issues and present a polished, well-run business when buyers show up. Last-minute risk mitigation under deal pressure often looks reactive — and buyers price that uncertainty into the deal.
What are the most common signs of operational risk that turn buyers off?
Here are a few red flags buyers look for:
- The founder is still involved in day-to-day sales, client delivery, or operations
- There’s no clear org chart or leadership accountability
- Key processes aren’t documented — they live in the founder’s head
- Revenue generation depends on a single rainmaker
- There’s no continuity plan if a key leader leaves
- Manual workflows are prone to error or inconsistency
These signals raise the question: “What happens if this team walks out after the deal?” If the buyer doesn’t feel confident in post-close continuity, valuation and structure suffer.
How can I communicate my risk reduction strategy effectively to a buyer?
The best way is to package it into your exit narrative:
- Include SOPs (Standard Operating Procedures) and org charts in the data room
- Provide a summary of customer diversification and retention metrics
- Offer documentation of internal audits or mock QofE assessments
- Share a timeline of recent operational upgrades (e.g., key hires, new systems)
- Be transparent about past issues — and how you resolved them proactively
When buyers see that you’ve already mapped and managed your risks, they’ll interpret your business as mature, scalable, and worth competing for. As Ed emphasizes in The Entrepreneur’s Exit Playbook, preparedness doesn’t mean perfection — it means clarity and control.