After years of hard work, you’ve finally decided to sell your business. But, before you get started, it’s important to be aware of the potential pitfalls that can arise. Selling a business is a complicated and time consuming process, and going about it the wrong way can mean serious losses. In this article, we’ll look at seven of the most common mistakes made when selling a business and what you can do to avoid them. Let’s get started!
1. Failure to Prepare
As it is for many other things in life, failing to prepare is the number one mistake someone can make when selling their business. All too often, eager entrepreneurs looking to cash in will skip due process and sell to whoever comes along with an offer, not realizing that they are leaving money on the table.
Making a worthwhile business sale starts with taking a serious approach; it’s essential for owners to take the time to address their company’s state, understand its challenges, and make improvements wherever possible.
Think about it – when was the last time you cleaned your storefront? Updated your office? Are the tools you’re using older than some employees? If the answer to any of those questions is negative, there’s some work to do before listing on the market.
Preparing a business for sale also extends beyond tangible qualities and into specific details. Financials are a huge part of a buyer’s consideration process and are pivotal to have on hand. You should have as many numbers and documents as possible – ideally a minimum of three years of profit and loss statements, tax returns, and balance sheets. They should be well-organized, clean, and accurate, as well as free of your own personal expenses. Cash payments should also be accounted for; while some sellers feel inclined to leave cash payments out in favor of less taxes, they often lower their final sale price in doing so. It’s estimated that every 30 cents of tax savings from this strategy results in a $3 drop in end payout.
If you’re having trouble finding and organizing your documents, or just need help through the process, a CPA or professional software tool can be worth the investment. This additional support can help you to make the most of your business sale and get you closer to realizing its full value.
2. Asking the Wrong Price
Asking price is perhaps one of the most important factors that go into the outcome of a business sale. It’s also one of the most challenging – both buyers and sellers have different expectations when it comes to value and reasonable pricing.
A common mistake made among first-timers, many business owners are inclined to ask inflated prices for their businesses. This is often done in the hopes of squeezing a higher sale price, and let’s be honest, is completely understandable. After all, you’ve put your life into this business – why not get as much value for it as possible?
But despite the perceived logic behind the strategy, asking a high initial price can actually be counterproductive to maximizing ROI. Inflated business valuations have a tendency to turn people off, and in some cases, one of those people could be the right buyer. Making a high sales price the only priority at play can also lead to headaches down the road if funding doesn’t come through or negotiations halt.
So, how can someone find a reasonable asking price and still make sure they’re getting their due? Start by researching and understanding what similar businesses are going for in your area. Check listings of other successful sales, or take into account the current market condition. If you need some figures to give you perspective, there are professional brokers and appraisal services that offer detailed business valuations and can help you set a realistic sale price.
At the end of the day, remember that selling your business is not only about getting the most money out of the deal, but finding someone who truly understands its value and potential. Finding a reasonable starting point will increase your chances of making a successful sale while still getting the fair payout for your business.
3. Lack of Professionalism
When considering a sale, professionalism should be top of mind. After all, if you’re trying to get someone to part with a large sum of money for your company, you need to look the part. A lack of professionalism on either side of the table can be a deal-breaker.
And it doesn’t matter how long it’s been since you last opened that door – as far as buyers are concerned, the professionalism of a business matters a great deal. Every interaction they have with one has an impact on their perception of it, and ultimately, how much they think it’s worth.
Keep up appearances, whether that means a second look at your company website, cleaning up old documents, or hiring professionals to help you through the process. The allure of a business is all about the potential of its growth, so don’t be afraid to put your best foot forward and make sure you’re represented in the best way possible.
Professionalism is also key when it comes to the sale process itself. While many business owners have an inclusive ‘do-it-yourself’ mentality, letting it take the reins in this context is pretty much always a bad idea. Selling a business is a complex and costly process, one that requires knowledge and expertise to pull off successfully.
Investing in experienced professionals like business brokers, accountants, lawyers and consultants can help you find the right buyer, negotiate fair pricing and address any potential legal issues that could arise down the road.
Brokers in particular are well suited to help you through the process, as they specialize in selling businesses and have a wealth of market knowledge to draw from. They’ll often be able to provide you with up-to-date industry data that can help you determine a reasonable asking price. Experienced ones have connections to existing pools of pre-qualified potential buyers, and can even help you manage the transition of ownership. This obviously has a positive effect on how easy a sale is to go through with a sale, but is also invaluable when it comes to letting buyers know that you’re taking things seriously.
4. Spending Time With the Wrong Buyers
If you’re in the market to sell your business, and especially if you have been for some time, it’s likely that you’re familiar with the concept of being approached by buyers who have no intention of actually buying. This ‘tire-kicking’ is a nuisance, and unfortunately, is a common trap for owners who are hopeful to cash in on any potential opportunity they have to sell their business.
It’s important to remember that the process of selling a business isn’t just about finding someone who is willing to buy, but also about finding the right buyer. Not all buyers are created equal, and while it’s tempting to pursue any offer that comes your way, be aware of those who make empty promises or aren’t prepared to put in the effort to seek out a successful sale.
Some people may come along with a seemingly amazing offer, only to draw your time and attention from those that are actually ready to put money on the table. It’s imperative to learn to spot the difference between a realistic sale and a ludacris one in order to get the most out of the process and avoid wasting your valuable resources.
The best way to protect yourself against this issue is by doing thorough vetting before you even start to negotiate a sale.
Is this person not only able to buy my business, but run it well?
Do they possess the right licensing and experience to operate the business?
Are they financially stable to close the deal if they decide to make an offer?
By taking into account all of these factors, you’ll be able to weed out those that are just ‘looking around’ and focus your attention on buyers who have the means, experience, and determination to close the deal.
5. Not Maintaining Confidentiality
Unlike how you would promote the sale of a car or house, businesses don’t erect large ‘For Sale’ signs when they’re put up on the market. The reason for this is twofold: one, it’s simply not practical to do so; and two, it would be incredibly damaging to the company.
When selling a business, confidentiality is key. Many potential buyers may use a company’s public announcement of sale as an opportunity to take advantage of the situation and offer lowball offers.
Before you even start the process, make sure that all signed parties are aware of the importance of maintaining strict confidentiality, and that this is enforced throughout the process. Doing so will help you mitigate any potential issues that could arise from a public announcement.
Aside from confidentiality, it’s also important to make sure that all buyers are subject to non-disclosure agreements. This ensures that sensitive material and information about your company remains confidential and that it’s not shared with any third parties.
Again, a business broker can be an invaluable resource in this process. They are experienced in setting up the necessary legal structures to ensure that everyone involved is aware of and understands the importance of keeping everything confidential.
6. Not Addressing Post-Sale Transitions
It’s important to remember that the work doesn’t end after you’ve closed a deal on your business. In fact, it’s at this point where much of the important work begins.
Once the sale has been finalized, you need to make sure that all post-sale transitions are properly addressed in order to ensure that the process goes as smoothly as possible.
While you may be leaving for retirement, greener pastures, or a life of leisure, your business still has employees and customers that need to be taken care of.
You’ll want to make sure that there is an effective, seamless transition period in place that ensures that the new owner is able to take over without any disruption. This will involve putting together a plan for staff orientation and training, transferring customer accounts and data, as well as addressing any legal or regulatory requirements that need to be met. In some cases, it’s best to stay on in a limited capacity after the new owner takes over to ensure that everything goes as smoothly as possible.
Some sellers consider this last phase of the sale a waste of time – if you’re leaving , why does it matter what happens next? But the truth is, it’s essential for the continuity of your business and its success. A good transition plan will help ensure that your business continues to thrive even after you’ve gone.
7. Not Hiring Business Brokers
Business brokers can be incredibly helpful throughout the process of selling your business. They are experienced professionals who understand the ins and outs of the entire process, from start to finish.
An experienced business broker can provide you with invaluable services such as market analysis, prospect screening, preparing and presenting your business for sale, negotiating on your behalf, and much more.
Utilizing a good business broker can help streamline the process, increase efficiency, and give you peace of mind in knowing that your business is in the best hands possible.
When selecting a business broker, make sure to do your research and select one that’s experienced with the type of business you’re selling. A good broker will be more than happy to answer any and all questions that you have about the process, provide you with advice, and ultimately help you through the entire process from start to finish.
While selling a business is an intensive endeavor, it’s completely doable as long as you avoid common pitfalls. Take your time and make sure you have a thorough understanding of the process so that you can make informed decisions and maximize your chances of success. Above all, remember to get help from the experts and utilize a business broker when possible. With their expertise, you can be sure that your business is getting the best representation and that everything is taken care of properly. Good luck!