There are few bigger decisions in life than selling your business. It can be a life-defining moment, and a lot of thought and discussion goes into making that decision. Navigating the selling process can be challenging and sometimes frustrating, but avoiding these common mistakes could have a significant impact on the success of your sale.
A lack of preparation is the most common mistake that business owners make, particularly when it comes to financials. Prior to going to market, owners should make sure they are managing their financials to maximize earnings. Short-sighted decisions to minimize earnings and avoid taxes result in reduced business value. For example, expensing some of next year’s costs in the current year distorts the true earnings for both years. Financials should be clean, accurate, and ideally prepared on an accrual basis by an outside CPA for credibility. It’s time to consolidate or eliminate perks, capitalize assets versus expensing them, and avoid running personal expenses through the business.
Planning ahead in other areas of the business will also add value to the business. Make sure key employees have signed non-compete agreements, that there is a strong management team in place, and that the success of the business isn’t dependent upon the owner. Identify and resolve any other potential risks to a buyer, such as making sure your customer base is diverse and all contracts are assignable.
The ideal time for selling a business is when it is thriving and the economy is good. Many owners decide to sell when sales or profits are in decline, when they are forced to sell for health reasons, when there is a dispute with a partner, or other unforeseen circumstances. When possible, it is best to control the timing and sell under favorable company and market conditions to get the best possible price. Don’t begin the process just before the next recession is likely to hit.
Quoting a Price
We recommend sellers avoid putting a price on their business. We don’t want to set a ceiling on price; our goal is to get the maximum value for our clients, so we approach the sale with an agreed-upon valuation of the business and we get feedback from the buyers that tell us how the marketplace values the business. Many factors go into the determination of an acceptable selling price, such as the structure and terms of a transaction. Communication between the seller and M&A advisor will ensure both parties are on the same page as it relates to the value of the business.
Wasting Time with the Wrong Buyer
Pre-qualifying prospective buyers will aid in a successful business sale. This process protects confidential information about your company and ensures that serious buyers with capital are the only ones that have access to key details of the sale. Remain open-minded about all qualified buyers so you can be afforded the opportunity to entertain multiple offers.
Inadequate Negotiating Experience
Experienced negotiators know how to deal with buyers and their advisors, keep the process moving and get the most advantageous price and terms. Many times when business owners negotiate their own deals directly with the buyer, emotion comes into play and money and/or key terms get left on the table. Leave the negotiating to a trusted advisor who will have the experience and your best interests in mind.
Keeping the sale of your business confidential will eliminate certain risks. If customers, vendors or competitors learn of the sale, it could negatively affect the bottom line, and therefore the price. If employees learn of the sale, they may leave for competitors or start their own competitive business. An M&A professional will have systems in place to keep the sale confidential and ensure a seller is not put in a weak position.
Let us help you avoid these mistakes when selling a business. Contact O’Keeffe & O’Malley at 913.648.0185.