10 Mistakes to Avoid When Selling Your Business
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Most sellers don't expect the exit from their company to be easy, but many are surprised by how difficult it can be to sell their business for a good price in a reasonable timeframe, especially in the current economic environment. It's important, however, to not let frustration get in the way of maximizing your sale.
The majority of frustrations and challenges sellers experience could be avoided easily with a little information upfront about the pitfalls of selling a business in today's market. There are literally dozens of challenges to overcome in a business sale--but here are the 10 that could have the most significant impact on both your business sale and your peace of mind.
- Insufficient Preparation
Lack of preparation is by far the most common mistake that small-business owners make. Just like you would spruce up your house before hanging a "For Sale" sign in the front yard, it's important to address several key aspects of your business before listing it in the business-for-sale marketplace. Financial documentation, sustainable profitability, lease issues, staffing problems and other concerns will not only impact salability, but also the price your business will command in the marketplace. Another thing to consider is that the time to start preparing for your business sale is right now--most brokers recommend owners start the preparation process at least two years before the business is listed.
There's nothing wrong with being confident that you are going to successfully sell your business at a good price--unless your confidence causes you to neglect activities that are necessary to make your sale a reality. Far too many sellers go into the selling process with the confidence that they will get top dollar for their business simply because they believe that is what it's worth. In the real world, valuation is based on quantifiable criteria, not the owner's personal estimation of worth. To avoid this mistake, get an objective third-party valuation, or visit online business-for-sale websites to see comparable businesses for sale, early in the process. Once you've identified an appropriate valuation for your business, address the issues that could lead to increases in value.
- Unwillingness to Leverage Professionals
You're an expert at running your business--not selling it. Yet it's always surprising how many sellers are averse to hiring a business broker to facilitate the sale of their business. Would it be nice to save the roughly 10 percent brokerage fee? Sure, but in most cases brokers are capable of adding at least 10-12 percent to the sales price. Even though there are certain circumstances in which a for-sale -by-owner approach makes sense, most owners are better off hiring a broker to handle important tasks like preparation, showing the business to potential buyers, marketing and negotiation. Likewise, don't hesitate to leverage the expertise of other professionals (e.g. accountants, lawyers, financial consultants) when you need them.
- Taking a Hands-Off Approach
Once you've hired a broker, your work is done, right? Not a chance. Unfortunately, many sellers make the mistake of disengaging from the selling process once they've signed a brokerage agreement. Although your broker will work hard to market your business, no one has more motivation to sell, or inside knowledge about the business, than you do. If you haven't done so already, have a conversation with your broker about how you can proactively market your business without stepping on his toes. In addition, once the broker has found a few qualified buyers, you'll play a key role in instilling confidence in the buyer that the business can be purchased and managed successfully. Whether you like it or not, your interaction with the potential buyer will have a large impact on whether your business sells.
- Failure to Pre-Qualify Buyers
Early pre-qualification of prospective buyers is essential for a successful business sale. Business sellers typically want to avoid qualifying prospects too soon for fear that will scare the prospects away. In fact, more often than not pre-qualification draws prospects deeper into the sale. More importantly, early pre-qualification protects sensitive information about your company from falling into the wrong hands and ensures that only serious buyers have access to key details of the sale. Pre-qualification documents like confidentiality agreements and financial background information are standard requirements for prospective buyers interested in seeing critical information about your business.
As a seller, you want to portray your business in the best possible light. However, there is a big difference between representing your business in the best light and misrepresenting your business to prospective buyers. At some point during the selling process you will be tempted to exaggerate numbers, distort projections or even cover up problems. However, misrepresentations send up red flags when prospects review the actual financials and can become the basis for legal action after the sale. Talk to your attorney or broker about everything, including business forecasts, before passing the information on to the buyer.
- Pricing Problems
Inexperienced sellers have a tendency to set a price (usually on the high side) before they've determined value. The reason this is such a big mistake is that price is the single most important factor in determining how long a business stays on the market. Sellers who have taken the time to conduct a thoughtful valuation process before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to reap the benefit of a faster, smoother sale.
- Only Entertaining All-Cash Offers
All-cash sales are unrealistic in today's business-for-sale marketplace. They can also be detrimental to sellers from a tax perspective. Instead of handing over a big chunk of cash at closing, today's buyers are more likely to need concessions in the form of seller financing, deferred payments or assistance in obtaining third-party financing. The benefit to you as a seller is that spreading sales receipts over a multi-year period can enable you to avoid higher tax brackets.
- Breaching Confidentiality
Confidentiality is important. If the word gets out that your business is on the market, it could adversely affect sales and your relationship with your staff. A good broker will know how to simultaneously market your business and maintain strict confidentiality. If you're pursuing a for-sale-by-owner approach, it's a bit trickier but it can be done by creatively targeting your marketing efforts to a small handful of likely prospects.
- Failure to Address Transition Issues
Many owners are so focused on selling their business that they completely neglect the transition process that will occur after closing. Some buyers will insist on the seller remaining on for a few months to assist with the transition or training, while others prefer a clean break. Either way is fine--as long as the buyer and seller have discussed the transition and reached a mutually acceptable arrangement during negotiations.
Whether you're selling on your own, or employing the help of a business broker, following these 10 tips will help maximize the success of your sale.