Selling a business, especially in the current economic climate, can be a complicated process. You want to get the best price from the right buyer and smoothly transition the business to the new owner. The process takes a significant amount of planning, negotiation, due diligence, and transition. According to Inc. Magazine, you should expect this process to take six to eleven months—and that is after a considerable period of preparation.
Mistakes to Avoid When Selling Your Business
It is easy to make mistakes during the sale of a business that can cost you thousands of dollars (or more). Below is a list of some of the most common mistakes made when selling a business and how to avoid them with your company.
1. Inadequate Preparation
To ensure a successful experience, it is important to keep your financial records up to date and your business history well-documented. Any legal issues should be cleared up. You should maintain a data room of essential financial and legal documentation and support, including a detailed sales portfolio, in anticipation of the moment when the perfect buyer shows up.
2. Not Considering Appearances
Just as if you were selling a home, you should do everything possible to make the business as attractive as possible to potential buyers. Failure to do this may make the sale take longer and can result in a much lower price than you hoped for.
Is your office space ugly and cluttered? Clean it up and paint it. Do you have personnel issues? Take care of them. Do you have taxes due? Pay them. Are there problems with your record-keeping? Fix them. Issues that seem small to you may be of great concern to prospective buyers. Failure to address them before listing the business for sale may cost you.
3. Not Considering the Structure of Your Business Sale
Too many business owners focus only on getting the desired price, but there are other considerations that can turn a full-price offer into a bad deal. For instance, you need to determine how much you will be willing to pay in closing costs, income taxes, and other expenses. Will the entire purchase price be paid at closing or is the buyer asking you to carry a loan?
You should consider whether and how much you want to stay involved after the sale. Are you willing to accept requirements of confidentiality and noncompetition that could hamper your ability to engage in other businesses? Are there noncash benefits that could make a lower-priced bid more desirable?
4. Waiting Too Long to Prepare
It is a common mistake for business owners to wait until the company is in trouble before thinking about an exit strategy. Ideally, preparations for selling your business should begin as soon as the business is organized. Remember, the best time to sell a business is when it is doing well. If you wait until sales start to dwindle, your health deteriorates, or you become desperate, it may be too late to attract a good offer.
5. Asking the Wrong Price
If you ask too much for your business, you may have trouble finding a buyer. Having to lower your price is a blow to your ego and may attract bargain hunters who try to get you to lower it even further. On the other hand, if you ask too little, you may be leaving money on the table.
6. Using Guesswork to Determine the Value of the Business
As the owner of the business, you may think you know what your company is worth, but unless you have a lot of experience in buying and selling businesses, your view is likely to be overly optimistic or pessimistic. For an accurate valuation, you should seek the help of someone such as a business broker who has the expertise to help you determine the true market value of your company.
The valuation process should take into consideration the condition of your enterprise, the current state of the market, the value of similar companies in your area and industry, and a host of other factors, including how quickly you want to sell.
7. Unwillingness to Consider Noncash, Part-Cash, or Deferred Cash Offers
Sometimes the perfect buyer does not have the cash resources to offer the price you expect. However, there may be other factors such as stock shares or interest in another business that may prove valuable. While such a transaction can be risky, it may be worth looking into, especially if acceptable cash offers are not forthcoming.
Some buyers may request concessions such as deferred payments, seller financing, or help in obtaining third-party loans. This could be of benefit to you since spreading out the receipts over a period of years may be a tax advantage.
8. Failure to Leverage Professional Services
Many entrepreneurs are experts in business management, but few have expertise in selling companies. If this is your first time selling a business, it may be unwise to try to do everything on your own. Some owners, hoping to save money, are hesitant to hire professionals such as brokers, outsourced CFOs, financial advisors, investment bankers, or lawyers to help with the sale. But this do-it-yourself attitude can lead to unforeseen consequences that can be more costly to resolve than paying for professional assistance.
9. Choosing the Wrong Professionals
It can also be a big mistake when selling your business to go with the first broker or consultant you come across. It is important to find someone who has significant experience selling businesses in your industry and has a great reputation with past clients. You should take the time to do ask for referrals you’re your peers, conduct multiple interviews, check references, and make an informed choice.
10. Disengaging from the Process
Too often, a business owner will hire a broker or investment banker and then expect that person to take everything from there. Realize that nobody is as motivated to sell the business as you are. When the broker sends you prospective buyers, it is your job to impress those prospects and help them gain assurance that they can be successful in managing the business.
11. Failingto Promote or Market Yourself
As the owner, like it or not, you are the face of your business. A prospective buyer wants to see your passion for the enterprise and understand how you manage it. Buyers need to feel confident that you will be able to help them make the transition after the sale. You need to be able to convince the buyers that this is a great opportunity and that you are someone they can trust.
12. Selecting the Wrong Buyer
If you care about your company, you will want to see it move into the hands of someone who will manage it well, maintain its mission and culture, and carry it to greater heights. You will also want to make sure that the buyer is trustworthy and is not likely to cause you financial or legal problems in the future.
13. Failure to Pre-Qualify Buyers
“Tire kickers,” “window shoppers,” corporate spies, and other non-serious prospects can deeply harm your sales effort and your business. It is important to keep sensitive information and key financial details from falling into the hands of such individuals. Documents such as confidentiality agreements and financial background statements should be completed and signed by potential buyers to ensure that they are seriously interested and financially capable of making the purchase.
14. Not Viewing the Business from a Buyer’s Perspective
As the seller, you are likely to overestimate the strengths and underestimate the weaknesses of your business. You need to take an objective view of the business and think about the questions your potential buyers are likely to ask. You may wish to use an outside consultant to help you with this.
15. Not Getting to Know the Prospective Buyer
To determine if a prospect is the right buyer, you need to spend time getting acquainted. Why does this person want to buy the business? What is important to them? Will they be active in the business or are they seeking at absentee owner business? How well would they fit into the company culture? What are their long-term goals? Will they be reliable and easy to work with? Getting answers to these questions can help you eliminate unsuitable buyers and gain leverage in the negotiation process. It is especially vital to get to know the buyer if you plan to offer seller financing or remain engaged with the business after the sale.
16. Negotiating with just one buyer
If at all possible, you should find multiple qualified prospects before starting serious negotiations. Having more than one option will help you get the best price and prevent you from making a bad deal out of desperation.
17. Mismanaging the Sale
Problems with the sale of a business often occur when there is poor communication between the buyer and seller, when important information is not fully disclosed, or when legal documents are ambiguous or invalid. Make sure both parties have a full understanding of the transaction and their obligations. It is strongly advisable to obtain legal counsel to set up and seal the agreement.
18. Misrepresenting Your Situation
As the seller, you want to represent your business in the best possible light. But you must not hide problems, distort numbers, or exaggerate successes. If your company is undergoing or has undergone litigation or legal investigation, disclose it. If there are unpaid bills or taxes due, be upfront about the situation. If you are having trouble with sales, operations, or employees, be honest about it. A professional adviser can help you know how and when to bring up these matters, but don’t wait for the buyer to dig them up during the due diligence process, or even worse, after the sale is complete.
19. Breaching Confidentiality
You need to be careful about how and when your employees, customers, and competitors learn that you are planning to sell the business. Letting the cat out of the bag too soon can have strong negative effects on company morale and sales. You also need to be diligent in keeping confidential any sensitive information such as financial status that prospective buyers may provide to you. Careless disclosure of confidential information can quickly derail the sale and may lead to serious problems such as lawsuits or loss of key employees.
20. Changing Your Mind
Seller’s remorse has caused many business deals to collapse. Long before listing your business for sale, you should be absolutely sure that this is what you want to do. Consider what your life will be like and what you want to do after selling the company. Make sure you have a solid exit plan and that you analyze each offer to make sure it is consistent with your plan.
21. Not Walking Away from a Bad Deal
It’s not necessary to give the same amount of attention and time to every offer. If you are dissatisfied with the terms or have major concerns, don’t be afraid to terminate the negotiations. Don’t succumb to the fear that this will be your last opportunity. Sometimes, knowing that you are willing to walk away will cause a buyer to come up with a more favorable offer or better terms.
22. Failing to Anticipate Transition Issues
Once the sale is complete, your work is not finished. The buyer is sure to come back with questions. The buyer may expect you to remain with the company temporarily or permanently or to provide training to your successor. You will need to transfer important information such as passwords and confidential documents. Any warranties and promises must be honored. There may be problems to solve or legal issues to address, especially if the agreement was not fully understood by both parties. It is essential to discuss and agree upon the transition process before the sale is done. Otherwise, you may find yourself spending a lot of unexpected time and money and missing out on other opportunities.
Selling a business can be a great way to enhance your financial future. But it can also cause tremendous problems if done wrong. For most business owners this should not be a do-it-yourself endeavor. Finding the right professionals to assist you with the process can save a lot of headaches and may lead you to a better deal. If you would like further information or financial advice, we invite you to visit preferredcfo.com or talk to one of our CFOs.
About the Author
A veteran of the financial services industry, Kyle has served as CFO, COO, and Senior Auditor for organizations such as Arthur Andersen, LLP and CSI Capital Management, Inc. He has also served as the CFO for the general partners of Athlon Venture Fund I, LP and Dawson Real Estate Fund, LP.
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