You’ve invested years into starting and growing your business. But, chances are, you’ve never sold a business before. You’ve got one chance to get this right.
So how do you maximize your odds and keep from making mistakes?
At MidStreet Mergers & Acquisitions, we’ve successfully assisted hundreds of business owners in the sale of their business. Along the way, we’ve seen common mistakes cost owners dearly.
We’ve compiled a list of the top 10 mistakes business owners make when selling to help you avoid the same pitfalls.
Let’s begin.
Top 10 Mistakes When Selling a Business
1. Not Starting Early Enough
If there is one thing we’ve heard over and over, it’s the phrase “I wish I would have prepared to sell earlier.”
Few owners prepare to sell their business in advance.
Why?
Preparing to sell can seem like a daunting task. It’s an emotional decision that deals with your sense of identity. And you don’t want to work with advisors who will lead you down the wrong path.
But starting early accomplishes several things:
- It gives you time to organize your financial books and records
- It allows you to adjust the way you run the business to make it more appealing to a future buyer
- It helps you understand your future tax burden and gives you the necessary time to work with an accountant to help you minimize your tax bill
In order to make the selling process smoother, you should aim to have clean books and records, an operations manual, and an organizational chart. Talk with an M&A advisor and ask them what else you can do that would better prepare you for a sale in the future.
2. Not Having a Deal Team
The first step to preparing in advance is to assemble your “deal team.”
Your deal team may be comprised of:
- A CPA
- An attorney
- A wealth advisor
- An M&A advisor/business broker
These professionals, specifically your attorney and CPA, should have demonstrated experience with business sales.
While you may have a long-term relationship with an advisor, if they’re not experienced in acquisitions, it could cost you.
You wouldn’t choose a foot doctor to perform your open-heart surgery. While they’re both medical professionals, they have vastly different knowledge and skills.
When assembling your deal team, start by speaking with a merger and acquisition (M&A) advisor. Ask your advisor to perform a valuation of your business so you can understand what it’s worth.
Then, meet with your CPA to determine the taxes you’ll owe and what your profit from the sale will be.
3. Not Preparing for the Emotions
It may be a big step to even admit you’re beginning to think of selling. In fact, most business owners think about selling for several years before they’re actually ready.
You’ll go through a roller coaster of emotional highs and lows.
One day an employee backs into a customer's mailbox. Out of frustration, thoughts of selling begin to enter your mind.
The next day, you land a customer that you’ve been coveting for several years. And, just like that, you’re back in love with your business.
These thoughts are a normal part of transitioning away from something that’s been such a big part of your life. Change is hard.
And once you’ve made the decision to sell, the emotions aren’t over.
We’ve had big burly contractors cry at the closing table. And it’s understandable.
Starting and growing a business is something to be proud of. You worked your butt off along the way; you’ve had sleepless nights, took money out of your pocket to fund the business, and created jobs for your employees.
Being the owner is also part of your identity. Family and friends know you as the owner of your business.
You care about employees. You’ve been there to see them get married, you know their kids.
It can be a lot to take in.
Our recommendation? Spend plenty of time making plans for what you’re going to do after the sale. Set goals. Finish up your bucket list.
Life doesn’t end after you sell your business. Don’t let fear keep you from accomplishing your goals.
4. Going With the First Buyer, Not The Best Buyer
When you sell your business, it may be tempting to go with the first buyer that approaches you. After all, it can be a nice feeling to see the big number in their offer.
Remember: this is just the beginning. Don’t jump on the first offer before you have given other buyers a chance to look at the company and give you their opinions as well, especially strategic buyers.
The best way to find the right buyer is to work with a broker that will market your business well so that you will have multiple buyers to choose from. This strategy allows you to compare buyers to find the best fit and get the best price for your business.
5. Not Disclosing Important Details
When speaking with your advisory team, be transparent and disclose important details of your company to them. With the full picture in mind, your broker will be able to present any potential issues in the best light possible while still remaining honest with your buyer.
If you were a buyer, which would you feel more comfortable with: finding something negative out about the business yourself or having the seller tell you?
Getting ahead of issues and disclosing certain things upfront can actually help gain the buyer’s trust, even if the disclosure is negative.
6. Negotiating Too Much or Too Little
Being inflexible on deal terms is the quickest way to lose a deal.
When you decide to sell your business, go in with the expectation that not everything will go your way.
You can prevent a deal from falling apart by letting your advisor know what is important to you so they can negotiate on your behalf with those things in mind.
Experienced brokers will negotiate on your behalf to get you the deal terms that are actually important to you.
There will be a lot of things to negotiate like price, training period and consultation, allocation, deal terms, seller financing, and earn-outs. There will need to be some give and take on each of these points.
7. Unrealistic Value Expectations
Trying to overprice your business with the hopes that you get a rich, uneducated buyer is not a good plan.
In some cases, M&A advisors will advise you to list your business without a price in order to have the buyers come to their own opinion of how much your company is worth.
However, brokers will not do this with every business, as it can also make buyers hesitant to inquire since it does not have a price.
Even if you list your business without a price, your broker will still perform a valuation to give you an accurate idea of the value of your business so that you know if you’re getting a good deal or not.
8. Not Preparing For New Management
Even though you might not have an employee interested in buying the business from you, work on developing your employees into management roles.
Building out your organization chart in this way will give the buyer a much smoother transition.
The best way to do this is to think about who you would put in charge if you were to go on vacation for two weeks. Whoever comes to mind is the person you should work on developing further.
Some business owners may also choose to hire an operations manager. This can be a good investment if you have extra time to develop someone.
It will set your cash flow back a bit to add another salary for an operations manager rather than train someone internally, but it will make your company more valuable in the long run.
9. Focusing on The Sale More Than Running Your Company
One of the worst mistakes a seller can make is to mentally check out too early.
You may be ready to move on to the next chapter of your life, but the process of selling your business is going to require your full attention.
Since selling your business is a complex process, it is useful to have your deal team in place so that you can focus on running your company throughout the sale.
Until you sign the asset purchase agreement, train the new owner, and finish the consultation period, don’t take your foot off the gas.
Your revenue and profit will need to stay at or above previous levels. Why?
During the due diligence period, buyers and lenders will ask for your company’s most recent financials. This includes a year-to-date comparison with the previous year.
If there is a drop, the buyer may want to leverage this to renegotiate the price or the lender may start asking a lot of questions.
10. Selling at The Wrong Time
Many sellers wait too long to sell, often because they procrastinate developing an exit strategy.
By waiting, you might be forced to sell at a low rather than a high. Many sellers are forced to sell due to health reasons, a downward trend in the business, or desires to pursue other interests not related to the business.
If you find yourself thinking about selling at a low, in order to sell for a higher price, you should let your business hit its bottom and then bounce back up for at least a year.
Establishing this year of renewed financials lets buyers and lenders see the bottom level of your earnings in comparison to its increasing earnings.
You should also consider the economic cycles and how the market is doing. We have had sellers wait too long and miss selling their business at an economic high point, costing them millions in the sale.
You’ve invested a lifetime building your business, which is why you should maximize your company’s value when selling.
With an appropriate exit plan mapped out, you can sell at the right time - on your terms.
Prepare Ahead of Time to Sell Your Business Successfully
You can avoid all of these mistakes by conducting research and planning before selling your business.
Choosing to work with a deal team experienced in transactions can help you avoid these common mistakes.
To learn more, check out our blog on the process of selling your business, or give us a call today to get started.
Know Your Company's Worth
Prepare to sell by determining the value of your business.
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