Selling a business is a complex process, and mistakes can be costly. Many owners stumble by not knowing their business’s true market value or failing to prepare it for sale. It’s also crucial to understand the buyer’s perspective, thoroughly vet potential buyers, and be willing to walk away from a bad deal. Avoiding these common pitfalls can ensure a smoother, more successful sale. Below we will share the 7 common mistakes we see sellers make.
NOT KNOWING THE REAL VALUE OF THE BUSINESS
One of the most costly errors an owner can make is not being aware of the market value of his or her business prior to entering the sales process. Although the marketplace may ultimately determine the final price, an owner needs to know the market value of the business. Before making the decision to sell, owners should work with qualified professionals to place a value on their company. There are several alternatives to obtaining an outside opinion. A valuation firm can be engaged. These firms are very adept at using various valuation methodologies; however, they are often not involved in the market and cannot bring perspective to the valuation. Another source is the company’s outside accounting firm, and the accounting firm may be hindered by a lack of experience in market conditions. However, an experienced intermediary should have both the technical ability as well as the market experience to produce the most realistic valuation. Engaging an intermediary may be the only alternative that requires the advisor to support his or her opinion by selling the business. A hybrid approach would be to have the outside accounting firm review the intermediary’s value conclusion. Only after getting an independent market opinion of value can the owner decide whether selling the company is the best option at that time.
NOT PREPARING THE COMPANY FOR SALE
Deciding the appropriate price or value is only the first step. Prior to exposing the business to the marketplace, preparation is necessary. A company is certainly not a house, but the same attention to appearances prior to a sale is necessary. Financial and legal affairs should be current. Anything a potential purchaser might want to see should be up-to-date, accurate, and available for review. To ensure the business is comprehensively presented, and to avoid mistakes, a document known as a selling memorandum should be prepared. This takes time on the front end but it will save countless hours once the process begins. Momentum is very important in business transactions and can make or break a deal. If there is a constant need to develop due diligence information after an offer has been accepted, the buyer’s momentum can be destroyed. Demonstrating preparedness places the company in a favorable light, and prospective buyers will feel comfortable that everything is in order. Being unprepared can delay a closing, create costly expenditures to play catch-up, and cause prospective purchasers to lose confidence in the deal itself. Too much time always works against the deal coming to fruition.
NOT BEING ABLE TO SEE THE COMPANY THROUGH THE EYES OF A BUYER
This can be very difficult for any seller. It is only natural to see one’s own company in a most favorable light and overlook the blemishes or problems inherent in any business. Sellers have to approach their company realistically, knowing that a potential buyer will be doing the same. By recognizing the deficiencies of their business, sellers are in a much better position to deal with concerns of the buyer. In fact, the best way to handle any potential problem area is to bring it up in the very beginning, and offer potential solutions at that time. Remember that buyers want to see solid management, good earnings, and growth – and they expect to be purchasing the future, not the past.
NOT KNOWING THE BUYER
The better a seller can get to know the buyer, the smoother the transaction. By knowing the buyer’s motives, interests and background, the better equipped a seller will be to make informed decisions about whether it is the right buyer to operate the business. When final negotiations begin, knowing the buyer can help resolve some of the issues that will arise. Do the seller’s and buyer’s interests align? If the seller is financing the deal, can the buyer make the payments? If the seller is staying as part of the management team, can he or she work with the new management? The more the seller knows about why a buyer wants to purchase the company, the better he or she will be able to determine when to be firm in the negotiations and when to be flexible.
Related Article: Why Employee Retention Matters for Your Exit Strategy
TRYING TO SELL THE COMPANY TO A BUYER WHO DOESN’T WANT TO BUY
There are usually many more potential buyers than there are companies for sale. The question is – how serious are they? A buyer may indicate a great deal of interest, but when it gets down to the wire, he or she may back out of the deal. Some buyers want to buy only on their terms and conditions, some may have too many decision-makers to please, and others only want to buy the “perfect” company. Wasting time on those who aren’t serious about purchasing a company takes valuable time from the buyers that really want to purchase.
THINKING NO ONE KNOWS MORE, OR BETTER
Many business owners feel that no one knows their business like they do. They think they can do a deal by themselves. They don’t need, or want any help. They think they are lawyers, accountants, intermediaries and outside advisors all rolled up into one person. Then, when the going gets tough, they become impatient and inflexible. They blame others — usually the buyer — when the deal blows up. As the old saying goes, “The attorney who represents himself has a fool for a client.” The same could be said for the business owner who thinks he can sell his own company. Not using outside advisors is a serious mistake.
NOT UNDERSTANDING THE STRUCTURE OF THE DEAL
Regardless of the size of the deal this could be the scenario: an offer is presented, the seller takes one look at the price, immediately says “no” and refuses to look any further. The price, within reason, is immaterial. The real crux of the deal is how it is structured. Consider the negotiating axiom, “You can name the price if I can name the terms.” The terms and conditions are important. A seller may be ecstatic about price only to find that the “devil is in the details.”
NOT BEING ABLE TO WALK AWAY FROM THE DEAL
Too many sellers get so involved in trying to put a deal together they don’t see the big picture. They don’t realize the deal isn’t a good one and doesn’t serve their interests or those of their company. In other words, it’s time to walk away from the deal and go on to the next one. Many sellers don’t want to let the deal get away. Since they have invested a lot of time and effort, and probably expenses, it is often times difficult to just end it. However, in some cases that’s exactly what must be done. If the deal is not right and cannot be fixed, there is no other choice. It is much better not to do the deal than do a bad one!
