Selling Your Business: Nine Mistakes to Avoid
02 July 2018
Selling your business is a process during which you will encounter many potential pitfalls. Here are some of the major ones that, with a little forethought, you should be able to avoid. Throughout this post you’ll find links to more detailed information on each of these issues.
To be successful in selling your business, you must prepare both the business and yourself for the process. A good way to look at this is to ask yourself what would you want from the seller if you were going to buy your business.
Start your planning at least two – and preferably three – years before you expect to sell. Make sure your books are in order, that you’re current on your business’ registration, taxes and vendor obligations. Get your paperwork – contracts to perform, vendor contracts, employee records, etc., etc. – in order so that the information can be easily found by your team (see next item) and easily grasped by a buyer. Such efforts are part of what should be your exit strategy.
You should also prepare yourself mentally for the transition. If you don’t have a post-sale plan, your life in the immediate aftermath of selling could be quite discomfiting. I lived through such a discomfiting period myself after selling a business. I know whereof I speak.
Not Assembling the Right Team
Selling your business is likely to be a long and arduous process, one that will be made more so if you don’t have the right professionals onboard. You may be a fabulous producer of widgets or a singularly brilliant provider of some specialized service, but that does not make you an expert business marketer any more than it makes you a aeronautics engineer. Hiring yourself to sell your business is like hiring an ear, nose and throat guy to replace your kidney. Dumb.
Get yourself an experienced professional business broker – not a real estate agent; a transaction attorney – not your spouse’s cousin the ambulance-chaser; your accountant; and a financial planner (so you can develop a plan to make the proceeds last!).
Arguing About the Brokerage Fee
Like all other brokers – real estate, stock, currency, freight, etc., etc., etc. – business brokers charge fees. More than some of those other brokers, professional business brokers earn their fees.
Professional business brokers and advisors know how to present a business in the best light. They know how to get the deals financed. They know how to negotiate with buyers and will probably get you a much better deal than you would have gotten if you go it alone or rely on the wrong talent (real estate agents!). They’ve been doing this for years. Find a good one. They know what to do and how to do it.
Do Not Ignore the Process
You know your business better than anyone and no matter how detailed you get with your broker, he or she will never know the hundreds of details that 10, 15 or 20 years of running your business has given you. Stay involved.
A good business broker will be in regular communication with you, updating you on all developments – or on the fact that noting is happening. If your business has an excellent quarter, let the broker know. When the broker brings a buyer, be prepared to answer dozens of questions – the same questions you would ask if you were the buyer.
Do Not Forget the Need for Confidentiality
Employees, worried about their jobs under a new owner, might begin to look around for something else (thereby alerting MORE people to the fact that your business is for sale). Your clients and customers, wondering if a new owner will continue providing the first class service they gotten from you, may start looking for other sources. Your suppliers, having built up a personal relationship with and trust in you, may be inclined to change terms for the new owners. All of these things are bad for the business and ultimately reduce its value.
Setting the Wrong Price
Speaking of value, do you know what your business is worth? Not likely.
According to a UBS Financial Services report, 58% of owners have never had their business appraised. A buyer will perform its due diligence and closely examine the business’ earnings for the past three years as well as its future earnings potential. Buyers are smart and will look at what benefits they’ll receive from owning your business and compare those benefits to the benefits of other businesses they are considering. If you don’t know what the value of your business is, you’ll either leave a lot of money on the table – because it is priced too low – or your business will never sell – because it is priced too high.
You MUST be able to justify the price you want for your business. An experienced business broker can tell you what the market suggests your business is worth and will, with the valuation report the he or she produces, be able to justify the price to a buyer. We do this all the time. We’ve have had potential buyers back away from a deal but we have never had a potential buyer argue about the valuation.
Structuring a Lousy Deal
What are the terms? What are the tax ramifications? What assets and/or liabilities stay with you? How are payables and receivables to be handled? How will you be paid?
These and dozens of other issues will be part of the negotiations and this is where your exit team will save your butt; this is where they earn their money. Without professionals to guide you, the chances of you making one or more significant errors in the negotiating process are very good – and each such error will have the potential of haunting your post-sale life for a long time.
Under-estimating the Time Required to Sell
Selling a business is a time-consuming process that requires patience, persistence and professionalism. (A healthy sense of humor and access to the occasional adult beverage will also prove useful!) Some businesses – especially those that focus on a tiny, specialized market channel, can take a couple of years to sell.
In the case of specialized businesses or businesses in specific market channels, the number of potential buyers can be quite small. Such buyers have to be ready to buy – and your business needs to be priced to sell; that is, priced to represent good value to the buyer.
Smaller businesses that are properly priced can take up to a year – or more – to sell. Doing the marketing, identifying some potential buyers, vetting those buyers, the negotiation process, the subsequent due diligence done by the buyer, the inevitable renegotiation of some aspect of the purchase agreement, lining up the financing for the purchase, preparation of all the documentation – all these things take time. And it may take a lot of time to market (Step 1) simply to identify one or more potential buyers. Nothing else in the process can start until that step is completed. Do not expect selling your business to be a quick turnaround – unless it is being sold to family members or the existing management team – or it is being offered at half its value!
Do Not Limit Your Field of Potential Buyers
Limiting your buyer search geographically is foolish. Even if your business operates locally or regionally, the marketplace for businesses is global. Buyers come from all over the world. A professional business broker will know how to market internationally and, if it is appropriate, to identify and approach specific likely target buyers no matter where they are.
Your buyer might be a related business or one that operates in a foreign country, in a different language, using a different currency. If your efforts – or those of your broker – are not globally focused, you might never find that ideal buyer.
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. For example, if you’re considering selling your business, what is your biggest concern about the process? Are you wondering how to find out what it’s worth or how to find the right team? Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!
#business #howto #sellabusiness #becomeabusinessbroker