When selling your business, business owners must be careful not to make several common mistakes. Below are 5 mistakes to avoid when selling your business. In most cases, business owners pour their hearts into their businesses, which can make selling difficult. It’s hard to divest of a business that’s been a part of who you are for years. That’s why it’s easy to make mistakes throughout the sales process. Here are five common mistakes to avoid when selling your business.
Not Properly Preparing When Selling Your Business
Experts routinely cite a lack of preparation as the most common issue when selling a business. Proper preparation takes time, which means it’s essential to start focusing on the project well before placing the business on the market. So, what does that mean?
Make sure all financial documentation is readily available. All recent tax returns, profit and loss statements, lease or title documents, and current business plans should be in hand before seeking a buyer. Basic statistics, such as number of items sold or services provided in a year, number of customers, how much of your business they represent (customer concentration), how much you charge, what does this cost you, are other basic questions the buyer will want to know. As a rule, buyers will want those types of documentation, as well as others, before they would be willing to present an offer. It also pays to make the business as presentable as possible. Business buyers are much like home buyers—they are influenced by first impressions.
Failure to Take Advice from Professionals
Far too often, business sellers try selling without working with professionals who really understand what it takes to market a business successfully. Business brokers work with sellers and buyers all the time—business owners don’t. It’s a rare seller that’s well-versed in setting a reasonable asking price, creating marketing materials, marketing a business properly, running a due diligence process, negotiating with buyers, bankers, accountants, and attorneys.
In addition, it’s important to work with accountants, financial planners, and legal advisors when selling a business. Knowing the tax consequences, legal pitfalls, and estate planning options prior to selling can make a considerable difference in the net, after-tax sale profits realized.
Distancing Yourself from the Sales Process
Sellers often feel that once a business broker is hired, their work is done. That’s far from the truth. While a business broker handles countless details during the sale process, owners must still be willing to step in when needed to assist. That might mean speaking with prospective buyers to explain specific aspects of the business or making changes in the business ahead of time, to attract more buyers.
Business sellers should also discuss active participation in the process with their business broker. In many instances, sellers may be in a position to help find a buyer, but that would depend on the business type and how confidential the owner would like the process to be. Here, it’s always wise to listen to the business broker to determine what limits should be in place.
Again, remember that sellers are the experts when it comes to the business itself. No one else is more qualified to explain why specific strategies have been employed and how the business plan was developed. Always be prepared to answer those types of questions confidently and accurately with statistics available to back up claims.
Not Exploring All Your Options
One issue that’s frequently ignored is not carefully considering all your options prior to putting a business up for sale. In many instances, money is left on the table when it’s simply not necessary. Here are just a few things to think about when selling your business:
- Timing is important. When a business is placed on the market can easily impact its selling price. For example, trying to sell a bicycle business in Minnesota during the winter may not be beneficial. Potential buyers won’t see the traffic that’s normal during early spring or summer months. However, with seasonal businesses, if the Seller can show growth, year-over-year, even in slow months, it may not matter. Selling on the way up, rather than down, is key.
- Considering the value of employees. Key employees staying or leaving after a sale can have a significant impact on the business’s value. If you’re selling, it makes sense to work with employees during the process to ensure they stay. However, often employees are not told of an impending sale until the deal closes. This can be emotional for employees. It’s important to think about retaining key employees for the buyer. Think about what you will say ahead of time to ensure a smooth transition. Normally, as long as employees are assured that they will retain their jobs, they will take the news well. It’s also important that the Buyer does not change too much, immediately after the close. Employees can be resistant to change. Let them ease into it.
- Including patents and other proprietary or intellectual property. In some cases, there may be patents that are not currently used in the business. The Seller may have created these for a new business line, but never acted upon it. If including those patents, trademarks, or other intellectual property that would significantly increase the value, consider doing so. Obviously, there are several factors in play with this type of decision that your business broker or other advisors, such as patent attorneys could assist with.
Also, are you willing to stay on in an advisory or employee capacity? While in an SBA-backed deal, a Seller may only stay on as an employee or consultant for a year or less, buyers are always worried about a smooth transition. If the buyer is not well-versed in operating the type of business you are selling, being willing to help with the transition in a longer capacity might make the difference in the buyer’s decision to buy your business or not. In a larger transaction, a private equity buyer may ask the Seller to stay on as CEO for longer than a year, while buying the majority of the business and giving the Seller a chance to cash out a portion of the business.
Setting the Asking Price Without Considering All Factors
One of the most important aspects of selling any business is setting the asking price. In smaller deals, it’s usually expected that the business broker and Seller will set an asking price. In larger, lower-middle-market or middle market deals, the buyers will determine their own asking price. However, even in the larger deals, the buyers will always want some idea of whether the Seller’s expectations are reasonable. Some sellers are too quick to set a high price without considering all the ramifications of that decision, but other sellers are prone to set the price too low. Neither of those situations is advantageous to the seller.
A business broker will use different valuation techniques when evaluating a business to arrive at an accurate price. They compare the seller’s business to other similar businesses that are currently for sale or have recently sold. They also use the income of a business as a guide when building discounted cash flow or capitalization of earnings methodologies. Finally, for distressed businesses, they may look at the liquidation values or replacement costs of the existing buildings, equipment, and other property.
At that point, the business broker will review the figures with the Seller and explain how and where they obtained the figures. Understanding all the approaches to valuation makes it easier for a seller to establish a fair asking price. The majority of business brokers will encourage sellers to be realistic and set a price that’s not too high or low for the existing market conditions.
Another aspect to consider when establishing an asking price is predicting where the market will go in the near future. For example, a business that’s in a growth industry can command a higher price than one in a declining sector. Also, the stage of the business cycle may be an important factor, as well, depending on how fast the Seller may wish to sell the business.
Now is the Time to Contact a Business Broker for Advice
If you’re considering marketing your business in the future, now is the time to get in touch with a business broker. We cannot emphasize this enough. Business brokers will suggest changes to make the business more marketable and outline the steps a Seller should take prior to putting the business up for sale.
With proper preparations, the likelihood of the business selling for a realistic price, or selling at all, goes way up. That means a Seller can move on to the next stage of their life.
