26th July 2022
Mistakes to avoid when selling a small business
Most successful business owners plan, strategies and work very hard over the years to build a successful business but when it’s time to sell, business owners make drastic mistakes resulting in selling the company for a lower value (If the business sells), stress, and all the hard work going down the drain, it is basically like growing a tree for many years but not be able to enjoy the fruits of your labor. These mistakes are often easily avoidable.
According to the data from BizBuySell and other industry sources it usually takes at least six to eleven months to sell a business and it is mostly true in our experience of selling businesses, so this article is about business owners who want help in understanding the mistakes that avoidable and make the process of business sale as smooth as possible. Let’s look at the ten common mistakes to avoid when you have decided to sell your business.
Mistake 1 # Not reaching out to right professional in early stages of planning & trying to sell your own business
In our opinion if this first mistake can be avoided most of the other mistakes are very unlikely to happen. Finding the right business brokers and assembling a good transaction team with the help of business broker is crucial to your success. Planning the sale with your team way ahead of time (Depends on the type of business) puts you and your business in the driver seat especially when you are going through this process for the first time. Serious buyers are looking at many businesses and when you do not stand out, they move on to the next business very quickly.
A good transaction team consists of a certified business broker, financial team (accountant/bookkeeper), Legal team (transaction attorney), Tax Professional ect. Speak to each professional and make sure they have substantial experience in selling businesses and let your broker handle the process and coordinate the entire sale process while receiving constant updates.
Mistake 2 # Misrepresentation of business facts to potential buyers in an attempt to sell quickly
As a business owner it is your responsibility not to misrepresent any facts to potential buyers. As discussed above the process of a sale is lengthy and if buyers find out any misrepresented facts during the due diligence, they will back out immediately and will have to start the process of finding the buyer again losing valuable time hence hindering the sales process. If the business sale goes thoughts and later the misrepresented facts are uncovered a legal proceeding can be very costly. Avoid the temptation to exaggerate number for a quick sale, do not hide any previous or ongoing litigations or legal investigations, disclose any unpaid taxes or bills. Talk to your attorney and broker about everything before passing the information to the buyer and avoid and potential red flags which can kill a deal.
Mistake 3 # Having an unrealistic asking price
Pricing is a single most important factor which determines how long a business stays on the market regardless of how good the business is. Asking a premium for a well-organized(structured) and good cash flow business is acceptable but asking an unrealistic value will means buyers will walk away. When a business is on the market for a long time it attracts wrong buyers who are looking for a bargain which is exactly opposite of what you actually planned for when you listed the business for a premium.
Many inexperienced sellers will value their business based on their investment money and time or sometimes calculate the amount based on how much they need to retire. None of these factors determine the value of the business. The value of the business is determined by many factory to name a few: current cash flow, seller discretionary earning(SDE), Future project earning ,Growth potential, Desirability of a business(Trend) and most importantly market value of the business which is for how much similar business sold for .A qualified business broker or a certified business appraiser are key in valuing a business correctly and the main goal in valuing a business correctly is to prepare backup material to defend the value of your business.
Mistake 4 # Business not structured for a sale and seller being a irreplaceable employee in the company
This is mostly true for a small business. It is very important to build and have a certain leadership team that handles every aspect of the business making the business self-reliant like a well-oiled machined which keeps on running with a snag. If the business owner is a key employee in a business organization like leading sales driver / head of operations / head of marketing ect.. and you have decided to sell the business in the next year or two, develop or train a employee in that role which will be one of the biggest selling points of the business and lay a foundation for smooth transition when you sell the company.
Mistake 5 # Failing to get organized for a sale ahead of time and not operating the business properly during the sale process
These two factors are interlinked and as discussed above this is very avoidable if a qualified business broker guides you well in the initial stages of planning. Due diligence period of sale can be very exhausting, buyer and their team will require you to provide many reports related to finances, customer, marketing, sales, vendors, employees ect .
So, keeping updated records, organizing books and records by separating personal and business expenses, resolving pending and threating litigations, tax issues, EPA compliances, licenses, leases, staffing issues ect will tremendously help you when the business is listed for sale because the main goal for the owner during the sale process is to run the business successfully and increase the sales of the business and not to run around organizing or resolve things which can affect the business. It is not possible to fix everything at once and when you are organized you will have plenty of time to address any unexpected issues that needs to be addressed.
Mistake 6 # Not maintaining confidentiality during the sale process
Confidentiality is a critical aspect in understanding why it is not advisable for the owner to sell their own business. Just imagine how hard it is for seller to talk with potential buyers without revealing their own business/identity and take phone calls during business hours. If the word gets out that the business is on the market for sale employees may leave, in some cases vendors can hold back on deals, customers may leave and competitors will have other ideas, all these can lead to disruption of normal processes potentially affection sales .A good broker will know how to market the business and maintain strict confidentiality .Pre qualifying the buyer is very important as you want to keep tire kickers out the picture and not disclose any sensitive confidential financial information.
Mistake # Not discussing transition, leases and other terms clearly till the last moment
Do not leave any unaddressed issues till the last moment after all the effort and hard work you put into the sale process like discussing the transition process ahead of time, talking to landlords at the last moment can be deal killer if they substantially increase the rent amount, employment contracts, and issues with transfer of licenses or patents ect.
Selling a business is rarely easy. Selling your business can be tricky. But if you follow our advice and tips above for selling your business and avoid these 7 mistakes a lot of this frustration can be reduced and you will be able to make a sale happen for the right price & terms.