Selling a business is not a walk in the park, contrary to what many business owners think. Here are five common mistakes that entrepreneurs make when selling their businesses.
Building a business day by day is an arduous task that most entrepreneurs find fulfilling. It often takes years, sometimes decades, before your business grows to where you want it. Some people sell their business along the journey while others sell once they’ve attained their goals.
All in all, selling a business is not as easy as people often think. Many business owners know that exiting their business will be difficult, especially after years of work and building lasting relationships. However, even they often underestimate how complex selling a business is and the nature of transactions involved.
Yes, you probably want the best price in a reasonable timeframe, but are these the only things to look for when selling your business? If not careful, you could make many mistakes in the quest to sell your business, even when you have good intentions. Here are five common mistakes that we are tired of seeing when entrepreneurs put up their businesses for sale.
1. Lack of sufficient preparation
Every business owner knows there needs to be some level of preparation before selling a business, but you’d be surprised by how little effort often goes into this preparation. This common mistake ends up costing the owners time and money, even when they have a ready buyer.
Just like you should spruce up your house before you put a “For Sale” sign in your front yard, you should get your business in order before putting it up for sale. Failing to prepare the necessary financial documents or address your human resource challenges will affect the price of your business. You should also carry out an audit of your sustainability in the market and tend to any leasing issues you may have.
It is never too early to start preparing for the sale of your business. Buyers can smell desperation and they will use it against you when they offer a low-ball deal. So, don’t wait till you are ready for retirement before thinking of selling your business.
2. Failure to pre-qualify buyers
One of the most important aspects of selling a business is the pre-qualification of buyers. Sadly, most business owners get so excited at the prospect of selling that they forget to pre-qualify their buyers. Many people fear that pre-qualifying prospects might scare them away, and this may be a legitimate fear.
At the same time, pre-qualification offers a business some huge benefits and eliminates even more risks. First, it prevents sensitive information about your company from falling into the wrong hands. A lot of people may present themselves as buyers, but you do not know if they have ill intentions. Pre-qualification also helps you identify the serious buyers, which reduces the time it will take to sell your business.
You may have to set up your pre-qualification process. However, it is also necessary to have the standard pre-qualification documents, such as confidentiality agreements and financial background checks.
3. Overvaluing your business
Negotiations are bound to be tough if you have an unhealthy number obsession. It is not uncommon for business owners to tell you that they can’t sell their business below $5 million in cash. We do understand that you have slaved for years to get your business where it is, but you should be reasonable during negotiations.
You must sit down with your accountant or professional advisors and value your business. Making unreasonable demands before valuing your business can scare away potential buyers. Take time to carry out a comprehensive valuation process before stating your asking price. This allows you to defend your price, too.
It is also prudent to be flexible in your sale terms. A buyer may be willing to offer you the $5 million but in two equal annual installments and have you stay on as a consultant. If you are flexible enough, then you should see this as a reasonable offer.
4. Not leveraging experts
You may be an expert at running your business, but you are not an expert at selling businesses. Having this clear distinction in mind can save you from a lot of trouble. Every business owner would love to save that 10% brokerage fee, but these professionals add more value to your sale.
Professional M&A advisors have years of experience negotiating the successful sale of businesses. Selling your business by yourself may seem like an easy task at first, but many entrepreneurs end up regretting the decision. Business owners end up making grave mistakes or neglecting their business when searching for a buyer.
Selling on your own may make sense in some industries or certain circumstances, but never fail to leverage professional help if you want to realize a successful outcome. Professional advisors have years’ worth of experience and can help you avoid the mistakes owners make when selling.
5. Misrepresenting your business
No one wants to portray their business in a bad light, especially when trying to sell it. That said, it is important to note the difference between misrepresenting facts to potential buyers and portraying your business in the best light. The latter may get you attractive offers, while the former may be the subject of a lawsuit after the sale.
It is not uncommon for buyers to exaggerate numbers, hide staffing challenges, or distort future financial projections. This is, however, unethical and may even lead to a lawsuit when your buyers find out they were hoodwinked. Talk to your attorney or advisors to find out if you are bordering on anything illegal when tooting your horn.
SF&P Advisors can help you avoid these common mistakes
Many business owners enter into negotiations by themselves thinking it will be a walk in the park. They often end up making several mistakes and wasting weeks, if not months, because they have no clue on what to do. If you have spent years or decades building your business, then it is only right that you get a partner to help you get the right deal when exiting.
Professional advisors have the experience and skills to ensure you do not get a raw deal when selling your business. SF&P Advisors will work day and night to make sure you avoid these common mistakes and sell your business with no regrets. Simply contact us today for a quick consultation.