Common Mistakes to Avoid When Selling Your Business - O'Keeffe and O'Malley

Common Mistakes to Avoid When Selling Your Business

Nov 17, 2015

It is unlikely that you will just wake up one morning with an unflappable mind to sell your business. Business owners normally contemplate the idea over a period of years until an event triggers exploratory steps toward a possible sale. The preparation and process of selling your business can be as simple or complicated as your circumstances make it. Following are common mistakes that can easily be avoided by sellers

  • Lack of Planning - Most business owners run their business to minimize earnings, in order to lower taxes. However, prior to selling, one should maximize earnings, which drives value, even though it results in higher taxes. Reducing earnings by $1 will generally save about $.41 in state and federal income taxes, but the same reduction in earnings could cost $4 to $6 in selling price. A number of things need to shift in both the financial and operations areas of business to prepare for sale. These take planning. A few examples include: consolidate or eliminate perks, capitalize assets versus expensing them, have key employees sign non-compete agreements, identify and train others to perform an owner’s duties. Proper exit planning will yield a higher price.
  • Poor Timing - Often business owners wait until sales or profits begin to decline before they decide to sell. Some have to sell when the economy is weak or when interest rates are high. Frequently the decision to sell only occurs because of sudden health issues, a partnership dispute, or death. The business cycle goes through a recession every 5 to 10 years, so consider selling when your window of opportunity is favorable. Although circumstances may make it unavoidable, It is best to sell when it is your choice and under the best economic conditions, not under duress.
  • Demanding All Cash for Your Business - Refusing to finance a small amount of the selling price may tell a buyer that something could be wrong with the business.  By agreeing to carry a small amount of the selling price, you are letting the buyer know that you believe in the future of the business.
  • Inadequate Financial Records - Financials prepared in-house are not as meaningful or trustworthy as those prepared by an external C.P.A. You need consistency in your financial statements for several years. Financials with a lot of recasting of personal expenses will not be attractive to buyers.
  • Breaching Confidentiality - It is vitally important to maintain the confidentiality of the pending sale. If word gets out that your business is for sale, employees may leave or begin gathering information to start their own competitive business. Also, you will give your competitors a leg up, as they know your weaknesses and may tell your customers that you’re on the way out. All of this weakens your position.
  • Quoting a Price - Most business owners do not know the true value of their business. If you quote a price, it may be either below what the buyer would pay or way out of range. So many things go into the determination of price, including the terms of transaction. Another reason to never quote a price is that once you put a price out there, it is difficult to get more than that price, even if you can prove later that the value is higher.
  • Selling the Past - Most owners focus only on the past and do not outline the future opportunities of the business. While every buyer and the banks rely on historical information to evaluate a transaction, the history is not going to make money for the buyer. Explain the past and highlight the future by painting a positive picture of the company, its employees, and the industry.
  • Selling to the Wrong Buyer - Selling to employees, suppliers or customers may be a critical mistake. Problems can arise when they do not follow through with a purchase. Competitors can be a great prospect, but they must be handled with care or they can turn into the worst prospect. There is a bigger, broader market than you may realize.
  • Inadequate Negotiating Experience - Most owners feel they can negotiate a sale themselves, and they can. However, all too often they leave money or key terms on the table because they don’t know how to deal with the experienced buyer.  Experienced buyers will tell you what you want to hear as they know your hot buttons and how to trigger emotion. Experienced business negotiators know how to deal with buyers, keep the process alive, and get the most advantageous price and terms. It is in your best interest to have a negotiator work on your behalf.
  • Poor Structure - There are numerous ways to structure a sale. Many variables significantly affect an owner's net cash proceeds after taxes. Businesses sold on a stock basis versus an asset basis, allocation of the purchase price between equipment, non-competes, goodwill, leaseholds, consulting agreements, seller notes, and earn-outs all affect the buyer and seller in different ways. Your advisor can guide you and negotiate the best structure for your individual situation.

For more information about any aspect of a transaction, contact O’Keeffe & O’Malley at 913-648-0185.