The vast majority of businesses that go on the market for sale never complete a transaction.
External factors, such as credit markets or the overall economy, can help determine whether a deal happens, but generally the most important factors impacting a sale are directly under the owner’s control. Unprepared owners can make costly mistakes when selling their businesses.
These issues often come up too late (e.g., during negotiations) and can destroy a potential deal. Owners need to address any potential issues early in the sales and transition planning process. Let’s look at some of the most common mistakes owners make and what they can do to prevent them.
- Not knowing the value of their business. Owners sometimes have a number in mind that they want to net from a sale, which may be higher or lower than what their businesses are worth. Most owners don’t realize the extent to which value is in the eye of the beholder — different buyers will assign different values to the business based on what it is worth to them at that moment in time. Develop a range of values for your business prior to entering the sales process, so you can determine a reasonable selling price and compare it to what you need.
- Not understanding the perspective or intentions of potential buyers. The buyer seldom buys what the seller thinks he or she is selling, which is why you need to be educated about what different types of buyers may be looking for. For example, investors are usually looking for a future return on investment and growth potential. The synergistic buyer may be looking to improve the profit margin by eliminating the middleman, instituting economies in operations, or eliminating duplicate facilities or employees. Some competitors may see the business as an immediate increase in market share. Understanding various buyers’ respective criteria can help you more effectively market your company to their interests early on, and better understand why they offer the price and terms they do.
- Not having the proper advisory team in place prior to starting the business sale process. Owners often mistakenly believe they are saving themselves money by not working with advisors, but this can end up being a costly mistake. A business transition is a complex process — whether you’re selling to an outside buyer or transferring your business internally. Working with a seasoned business transition team will help ensure that you’re receiving the highest amount for your business and the best possible terms. The team will provide you with the guidance and assistance you need in order to protect your largest asset and secure your financial future.
- Trying to sell to the wrong people. Owners may think that the best investor for the business is a known competitor, customer, supplier, or even a friend. However, these buyers may not be financially qualified or interested. Owners mistakenly assume their best buyer is local, but today’s marketplace is global. There are thousands of quiet private investment groups and offshore investors that are interested in acquiring profitable, U.S.-based, privately held companies. Identifying the best buyer pool is a critical step in successfully marketing the business for sale.
- Not properly positioning the company for sale. Owners need to understand what different buyers are looking for so they can position the business in the best possible light. Key factors such as lack of dependence on the owner, a diversified customer base, growth opportunities, reputation, and industry leadership are some of the intangible qualities many buyers look for. Documenting improvements that can be made with new capital can help you to increase the perceived value of your company.
- Not preparing for the due diligence process. Buyers evaluate a business based on historical facts and figures, but they are most interested in the future growth potential, risks, and their possible return on investment. This requires intensive analysis and projections on their end, and can mean an arduous and time-consuming process for the seller. Emphasize the business’s growth potential during conversations.
- Not planning for life after sale. Many business owners have not calculated their wealth gap or how much money they need from the sale to live comfortably in their retirement. An owner may find out too late just how little he or she will net after all taxes and fees are deducted. It’s also wise to plan for the non-financial aspects of life post-sale to prevent seller’s remorse down the road.
The bottom line is that if you’re thinking about selling your business, you want to make sure you’re educated and prepared in order to avoid making mistakes at the outset of the process.