The Top Ten Mistakes Business Owners Make When Trying to Sell Their Business
Excerpt from EXIT RICH: The 6 P Method to Sell Your Business for Huge Profit (June 22, 2021; Fast Company Press) provided with permission by authors, ...
Excerpt from EXIT RICH: The 6 P Method to Sell Your Business for Huge Profit (June 22, 2021; Fast Company Press) provided with permission by authors, Michelle Seiler-Tucker and Sharon Lechter.
The 10 Mistakes Owners Make When Selling Their Business
Honesty is the fastest way to prevent a mistake from turning into a failure.” - James Altucher
Sellers are typically experts at running their business. However, some business owners know every single intricate detail of running the dayto- day operations, but they do not know and fully understand every intricate detail of selling their business.
How could they? Selling a business is a complicated and extremely involved process. That process requires a tremendous amount of time, energy, effort, experience, and knowledge of the entire business sale process. In this section, we will cover the top ten mistakes business owners make when selling their business. Hopefully, this list will help you avoid the pitfalls and common and costly mistakes many sellers make when attempting to sell their business.
Mistake 1: Sellers Wait Too Long To Decide To Sell Their Business
So many sellers wait to sell until they are burned out and have no interest in their business anymore. By not caring about growing or maintaining their business, the business will often start to trend downward. If this is the case, it is not a good time to sell your company.
The best time to sell is when you first begin to think about selling your business. When you are at the beginning stage—the thinking stage—the business is usually still doing well and will be in much better shape to sell. Remember: It could take several months to years to sell. You do not want to wait until you are ready to exit to think about selling your business. Starting a business and planning an exit strategy should happen simultaneously.
Business owners should follow the GPS Exit Model and set their business up to run without them and with the mindset that the business will be sold. They should ensure their business runs on all the 6 Ps. Too many business owners do not plan their exit strategy until it is too late. If you are reading this book and do not want to sell right now, that is okay. You will probably want to sell one day, and to maximize value, you must implement the tips and strategies outlined in this book now. Then when you are ready to sell, your business will be positioned to sell for top dollar.
Mistake 2: Sellers Tell People They Are Selling Their Business
Disclosing the sale can be detrimental to your business. Even if you just tell one or two people that you are selling, they might tell someone, who tells someone, who tells someone. By the time the story gets around from person to person, it has snowballed and twisted into something that can be even more detrimental. We have heard how stories about selling a business turned into rumors that the owner was going out of business, filing for bankruptcy, getting divorced, and worse. If you are going to sell, the number-one thing you need to do is maintain confidentiality.
Mistake 3: Sellers Attempt To Sell Their Business On Their Own
Instead of hiring a professional M&A advisor or business broker to sell their business, some sellers attempt to do this on their own. If you are not experienced in all phases of the sale, it could not only cost you extra profits; it could also cost you the sale. Instead, hire a professional to perform the following tasks:
Package The Business
There needs to be an offering memorandum (i.e., a CIM) written on your business that explains your industry and includes all the intricate details of your business. You must have a great CIM written on your business to pique buyers’ interest and leave them wanting to know more about your business. This will also help to eliminate the tire kickers.
Market The Business
You need to market your business without disclosing confidential information, which again, is almost impossible to do. If confidential information is disclosed, it could be detrimental to your business. As we mentioned throughout this book, it is almost impossible to sell your business on your own and maintain confidentiality.
Show The Business And Answer Questions
Professional M&A advisors and business brokers know when to show the business and how to get the buyer to emotionally connect to the business.
Negotiating terms is a huge step in selling the business, and most sellers fail miserably at it. It is very difficult for a seller to negotiate the price and terms for their business. We have negotiated and written up offers from buyers to sellers that have taken us hours—even days—to write. If the offer is not written correctly, it is quite likely that you will not close, because the seller—you—may leave money on the table, or—even worse—you may not be protected in the deal. This is not something you should do on your own and leave to chance.
You need a third-party company, such as an M&A advisor or business brokerage firm or an escrow attorney, to hold escrow. Without escrow, you do not have a committed buyer and a valid purchase offer.
Navigate Through Due Diligence
Due diligence is where the deal typically falls apart. It is imperative that due diligence be performed very carefully while the seller’s proprietary information is still protected. Due diligence should never be conducted without a POA or LOI and escrow money.
If you do not remove the contingencies by using a contingency removal form, the deal can fall apart, and the buyer can wiggle out of the purchase offer and demand their escrow funds be returned.
Facilitate The Close
Remember, if one step is left out, the business will not close. Again, this is not something that should be left to chance. Not using an expert opens you up to other issues, including qualifying buyers and valuing and pricing the business.
Mistake 4: Sellers Hire A Real Estate Broker Or Agent To Sell Their Business And Not An Actual M&a Advisor Or Business Broker
This is a huge headache with potentially damaging consequences to your business. Most real estate agents and brokers are experienced in selling homes or commercial property, not businesses. They do not have experience in valuing or pricing businesses. They do not know how to value inventory, FF&E, and accounts receivable. And they do not have access to industry standards and business comps. They also do not write CIMs. In addition, real estate agents do not understand and are not experienced in negotiating for businesses, nor are they experienced in working with buyers of businesses, and most also do not understand confidentiality. The motto in selling houses and commercial real estate is “the more you tell, the more you sell.” This motto can work against you when selling your business.
We have worked with many real estate agents in cobrokering, and nearly every single time they have let the cat out of the bag and breached confidentiality. Therefore, we do not disclose any proprietary information to real estate agents. They also do not post the listings to the available MLS business sites, nor do they implement a strategic marketing plan. They also do not have a database of the five different types of buyers we have discussed throughout this book. Instead, they post to one or two sites and run the ad in the paper sparingly. If you need heart surgery, you would not hire a chiropractor. Therefore, if you want to sell your business, do not hire a real estate agent to sell your most prized possession, your business.
Mistake 5: Sellers Do Not Secure A Long-Term Lease
If your business is predicated on location loyalty and not brand loyalty, you should secure a long-term lease. Sellers make a huge mistake by putting their business on the market when they are on a month-to-month lease. When you do this, buyers will go behind your back and negotiate a lease with the landlord to take your spot.
Many buyers think they can start a business on their own for significantly less than it would cost to buy an existing business. Also, if your business is predicated on location and your landlord will not extend your lease, you will not have anything to sell. Avoid the headache: Secure a long-term lease or a short-term lease with options to renew.
Mistake 6: Sellers Do Not Price Their Business Correctly
Approximately 75 percent of business owners do not know what their business is worth. Most sellers overprice their business, and buyers will string the seller along for as long as they can to gather information to compete against them or to get them to reduce their price. We have also witnessed firsthand sellers giving away their business for pennies on the dollar. Pricing the business correctly is one of the most important steps in selling your business. If you price it too low, you are leaving money on the table. If you price it too high, no one will buy. If you reduce or increase the price while the business is on the market, you send out signals that the business is not doing well and the owner does not know what they are doing. As we mentioned in the pricing section of this book, there are many steps, resources, and a psychology that goes into pricing a business for sale.
Mistake 7: Sellers Will Give Away The Farm When Selling Their Business
Some sellers give away all kinds of proprietary information without having the buyer sign an NDA and a noncompete agreement, if one is needed. Don’t make this mistake. It could end up costing you millions.
Mistake 8: Sellers Do Not Qualify Buyers
Less than 40 percent of deals handled between a buyer and seller come to fruition and close. Most deals fall apart because the buyer was never qualified in the first place. Do not waste your time on unqualified buyers.
Mistake 9: Sellers Focus On One Buyer
Some sellers put all their eggs in one buyer’s basket. The problem with that is if that deal falls apart, there is no plan B for another buyer. Sellers must then start the process all over again. To avoid this pitfall, sellers should work with multiple buyers. That way when one buyer falls through, several other interested buyers should be waiting in the wings.
You should also set up back-to-back buyer meetings and let the prospective buyers see each other. Start a feeding frenzy around the sale of your business. Create a sense of urgency in placing a bid. We have written up as many as seven offers or LOIs on one business and presented them all to the seller. When this happens, buyers start bidding against each other, and the seller typically accepts an offer that is higher than the appraised price with better terms and conditions.
Mistake 10: Sellers Try To Sell To Their Employees
Selling to an employee is a huge mistake. Nine times out of ten, the sale falls through for a multitude of reasons, usually financial. In most cases, there was no NDA or noncompete, and the seller never qualified the potential buyer to make sure they could afford to purchase the business. In addition, selling to your employees is a slippery slope, because you will have to expose the reason you are selling and the price, financials, and other proprietary information. If they cannot afford to purchase the business or if you sell to someone else, they will likely become disgruntled and could quit or disclose such knowledge to other employees (or anyone who will listen). This is a big risk and not one worth taking on your own. If you want to pursue an employee buyout, engage an expert M&A advisor or business broker to properly disclose and qualify their ability to purchase. Let the advisors play bad cop while you maintain your employee relationships.
Remember: Selling your business is one of the biggest decisions you will ever make. In most cases, you are selling your most prized possession. Also keep in mind that selling your business is an emotional process. Most sellers are emotional about the sale of their business and, in most cases, suffer from seller’s remorse. When people are emotional, they tend to make decisions based on emotions, not logic. When selling your business, hire a professional who uses logic to facilitate the sale of your business and maximize value in the quickest amount of time possible.
We encourage you to read this list a few times. Learn from the mistakes of others so you do not repeat them. One item that bears emphasis is that the process of selling a business is not the same as the process of selling real estate and is almost invariably beyond the experience of real estate agents or brokers. It is not a process driven by industry standard forms, and more importantly, it is imperative that the foundation for the sale be laid. You need an experienced advisor who knows not only how to find, attract, and qualify potential purchasers, but also how to package the business for sale, prepare for and facilitate due diligence, and work with your attorney to avoid or resolve the issues that almost always arise. Do your homework. Make sure that your advisor has the relevant experience. The fact is that some folks that hold themselves out as business brokers do little more than introduce you to potential purchasers, assuming they are able to find the potential purchaser in the first place.
About the Authors
Michelle Seiler Tucker is the author of EXIT RICH: The 6 P Method to Sell Your Business for Huge Profit and the Founder and CEO of Seiler Tucker Incorporated. She has sold hundreds of businesses to date and currently owns and operates several successful businesses. She is a leading authority on buying, selling, and improving businesses, as well as increasing business revenue streams.
A formidable force in her industry, Michelle closes 98% of all offers she writes and, on average, obtains a 20 to 40% higher selling price for her clients. Her remarkable track record proves her persistence and dedication to creating win-win situations for both her buyers and sellers. She has appeared in Forbes, Inc., CNBC, and Fox Business. She has also been a “celebrity judge” on “Pitch Tank” alongside Steve Forbes and Whole Foods CEO John Mackey. She lives in New Orleans.
Sharon Lechter is an entrepreneur, author, philanthropist, international speaker, and Chartered Global Management Accountant. With a 35 year career as a licensed CPA and a life-long education advocate, she is the founder and CEO of Pay Your Family First, a financial education organization. Regarded as a global expert on financial literacy, Sharon has served as a national spokeswoman and Presidential Adviser on the topic for two US Presidents.
Sharon co-authored the international bestseller Rich Dad Poor Dad and has released 14 other books in the Rich Dad series. Over 10 years as co-Founder and CEO, she led the Rich Dad Company andbrand into an international powerhouse.