So You’ve Decided to Sell Your Business
Whether you’re looking to retire, have started to feel bored or unfulfilled, or are simply ready for the next chapter in your life, you have decided to sell your business. Congratulations on reaching this milestone in your career!
And you’re in luck - for business owners, it’s a seller’s market. There may be no better time than now to offer your company up for sale. Due to the upward trend in economic growth, potential acquirers have more capital to invest and this spells opportunity.
However, not every business that goes to market is able to sell. In fact, only about 20 percent to 30 percent of businesses that go to market end up selling. Christopher Snider, president and CEO of the Exit Planning Institute, attributes this statistic to unattractive supply rather than to strong demand. "Multiples are historically high, but I think that’s more because the private equity companies and the strategic buyers don't have a lot of businesses to pick from,” he said. “There's not enough good quality businesses out there [for sale] for them to buy."
And so, in other words, business sellers are making critical mistakes when it comes to preparing and promoting their business for sale.
You’ve put your heart and soul into your business, and so it’s important to ensure that all of your hard work will be passed on to the right successor. So what can you do to maximize your chances of successfully making the sale? In this article we will discuss the fatal flaws that some business sellers make, and how you can avoid them.
Top 4 Mistakes to Avoid When Selling Your Business
1. Not Planning Ahead
This is arguably the most critical mistake that a seller can make. It takes an average of about two years to sell a business, therefore long-term planning is key to any successful business sale.
Recent surveys of business owners show that many have little to no exit planning in place, even though many of them have 80 to 90 percent of their financial assets based in the business itself. Essentially, these sellers are not maximizing the transferable value of the business and are not readying it to change hands successfully.
Why is it that so many sellers are listing their businesses for sale with such little preparation? Research suggests that an owner’s exit motivation (boredom, burnout, old age, poor health, etc.) may be causing them to rush to the perceived “finish line”, rather than perform their due diligence. This exit motivation leads to value reduction because the owner does not have the time or the inclination to plan their exit strategy, which takes both time and money.
So what’s the solution? The trick is to plan as far in advance as possible. Sellers that actually create a plan tend to be more in control over the outcome of the fate of their business.
2. Telling Your Team Too Early
During the initial phase of selling, you are going to be asked a lot of questions. Your potential buyer will ask for financial reports, marketing collateral, key account information, etc. They will likely also inquire about your staff and any key employees that keep your business afloat. It may seem reasonable to reach out to your team members as you sort through all of this information.
Don’t fall into this trap.
Informing your staff before the finalization of a sale can cause fear and uncertainty, all of which can affect the outcome of your sale. Buyers are interested in investing in a business that has everything under control, and any unnecessary drama within your company can give them cause to question their decision to buy.
Moreover, if word gets out to your competitors that your business is about to change hands, you can be certain that they will use this information to their advantage.
Another important factor to consider is your vendor relationships. Upon discovery of the business being for sale, vendors may tighten up on terms that directly affect the company (and its cash flow). For vendors, it’s all about reliability. If they get the feeling there is unpredictability ahead, they will no doubt react accordingly.
If you do choose to tell a few key employees about your plans to sell the business, make it clear that you are not yet ready to tell anyone about this and that they must be very careful to hold this information in the strictest of confidence.
3. Overestimating or Underestimating Your Business Valuation
Jim Alerding, a former member of both the AICPA Business Valuation Committee and the AICPA Business Valuation Standards Writing Task Force, warns us about the consequences of business valuation errors. “There is a minefield of potential errors and biases and rigging in the valuation process,” Alerding said recently during a Sageworks webinar.
Here is what to avoid:
- Asking for too much:
Giving your business an unrealistic price tag can halt your selling process before it starts. It is imperative to consider multiple factors when determining your business valuation such as: your industry, similar businesses and their sale prices, the economy, and your marketplace.
Imagine you walk into a supermarket and bananas are on sale for $100 each. Nobody is going to pay that price for a banana, regardless of how good they are. As a result, they will not be sold and they will simply sit on the shelf until they rot- same goes for businesses.
Furthermore, expecting to get top dollar for a business that generates slim profits is just plain bad sense. However, this type of company may do well with a going-out-of-business sale. This type of sale can generate instant cash flow and a quick turnover. Many sellers miss this great opportunity because they may not want to think of their business as having “failed”. Remember that there are various elements that come together to determine the success of a business, and it’s important not to take things personally. Always be mindful to look for the most valuable opportunities for your business, and avoid this type of self-sabotage at all costs.
- Asking for too little:
Often sellers will price their business too low because of their exit motivation, as we mentioned previously. Be careful not to let the temptation of a quick sale stop you from gaining back the capital that your business is truly worth.
Moreover, if a business’s sale price is clearly lower than what the business is worth, this may create suspicion amongst your potential buyers, causing them to simply look elsewhere.
Related: What is My Business Worth?
Also, check out Tresle’s free Business Valuation Calculator tool.
4. Incomplete or Missing Documentation
The last thing that can scare off a potential buyer is missing or neglected documentation. This is unfortunately a common mistake that many sellers make, which can of course be attributed to the various factors discussed above. In fact, 53 percent of business owners said they had given little to no attention to their transition plan as they entered the selling process.
Imagine you’re looking to buy a used car. Chances are that you would be less than enthused if the seller didn’t have any documentation to prove that the engine had recently been replaced, or that the emergency break was working properly - the same is true for those looking to buy an existing business. Peace of mind is imperative on both ends of a transaction if the sale is to be successful.
Essentially, the quality of your documentation package will directly affect the number of buyers interested in taking over your company. Luckily, there are various resources available for sellers that act as a sort of ‘checklist’ to help you identify the information that you will need to provide to the buyer.
For more on this, please send us an email at email@example.com and request a copy of our Due Diligence Checklist and Company Questionnaire to help outline the documentation that all buyers will want to see.
Selling your business can be a lengthy, intimidating process. The good news is that by making it to the end of this article, you’re already a step ahead. As long as you are able to avoid these pitfalls, you should be able to rest assured that your business will successfully end up in good hands.