As a business owner, you’ve probably given at least some consideration to the sale of your business.
Whether you’re nearing retirement, or just want to start weighing out your options for the future, it’s a good idea to start learning about the process of selling a business so you can start making informed decisions about how to proceed.
At MidStreet, we’ve helped hundreds of business owners sell their companies successfully with as few headaches as possible.
We’ve also seen business owners make mistakes that complicated the sale process and negatively impacted their business’s value.
Those situations are always difficult to witness because of how avoidable many of those mistakes are.
In this blog, we’ll break down nine mistakes that we've seen sellers make from the time they first consider selling, all the way up to when it’s time to choose a buyer.
Let’s get to it.
Mistake #1: Waiting Too Long to Prepare
When it comes time to sell your business, preparation is key. This may sound obvious, but there are so many things to consider before a sale, it can be hard to keep track of them all. To give yourself plenty of time, aim to prepare 1-2 years prior to launching the process with an M&A advisor.
Far too often, we speak with business owners who decide they're ready to sell their businesses when it's too late to start preparing.
Chances are, you’re going to sell your business someday. Even if you won’t be selling for the next few years, start preparing now to maximize the value and terms you get at the closing table. Doing so will also eliminate headaches along the way.
Preparing before it’s time to sell allows you to become as educated as possible on what it takes to sell your business. It also gives you plenty of time to interview and qualify the professional advisors you’ll need on your side once it’s time to take your business to market.
By waiting until you’re ready to sell your business to start preparing, you’re robbing yourself of the opportunity to get educated and take the appropriate steps to maximize your business’s value.
To learn more about how to prepare your business for sale, check out our blog "Top 10 Ways to Prepare your Business for Sale."
Mistake #2: Entertaining Just One Buyer
It can be easy for you to be so focused on getting your business sold that you become enamored with one buyer and ignore your other options, which is a huge mistake.
It's important to remember that people who are buying a business usually aren’t entertaining just one prospect. If they’ve expressed interest in your business, chances are they’ve probably inquired on four or five others. If they’re a financial buyer, it could be even more than that.
By focusing solely on one potential buyer, you can cause others to become impatient and proceed with one of their other engagements instead.
Don’t get us wrong, it's understandable why you could make this mistake.
It could be because you like a buyer's initial offer, or you’re worried if you don’t sell now, you never will.
Those are legitimate feelings, but it’s important you don’t let them prevent you from considering all your options.
In short, you want a pool of interested buyers for your business. Multiple qualified buyers can result in a bidding war, especially if strategic or private equity buyers are interested.
If you make the mistake of giving all your attention to one buyer, you could be missing out on a great opportunity to maximize the purchase price for your business.
Mistake #3: Keeping Unorganized Books
Simply put, unorganized books equal an unorganized business in the eyes of business buyers.
Because you're so entrenched in your business, it can be easy to forget that a buyer doesn’t have the same insight and knowledge you have about your company.
All the positive aspects of your business won't mean much to anyone if they're just floating around in your head. Buyers need to see them on paper to be convinced, and who can blame them?
If you’re selling your company to an individual, it’s not uncommon for them to sink their life’s savings into your business when they buy it. They need to be convinced that your business is a good investment, which is extremely hard if your books are unorganized.
Financial and strategic buyers rely even more on good record keeping, so if you know you've fallen behind, you'll want to get re-organized ASAP.
Unorganized books make it difficult for buyers to see the financial benefit in owning your business, but they can also make you seem untrustworthy.
You may not be able to provide certain documents buyers want to see, such as profit and loss statements made on an accrual basis dating back three years ago, or historical records of your ERP (Enterprise Resource Planning) system that manages your company’s operations.
Instead of seeing this as your lack of organization, it’s possible that buyers will see it as your attempt to keep certain info out of their hands.
The bottom line is that by keeping unorganized books, you’re not only doing yourself and your business a disservice, you’re also potentially scaring away buyers. They'll typically want to see your financial statements from the last three years, so it's never too early to start getting them cleaned up.
Mistake #4: Keeping Secrets
The importance of trust when selling your business cannot be overstated.
There are financial and personal factors at play, which creates a lot of risk and vulnerability throughout the process of selling. For this reason, you need to trust your buyer, and they need to trust you.
To maintain that trust, it’s always best to get ahead of anything about you or your business that could surface during a deal. If something happens to your business, whether it’s good or bad, inform your broker or M&A advisor immediately so they can inform buyers.
Remember, your skeletons will always come out of the closet. It’s better for you to open the door and show them to your buyer instead of crossing your fingers and hoping the buyer doesn’t notice: they always, always, always will.
And when they do, it's never pretty.
Mistake #5: Focusing Totally on Purchase Price
While you obviously want to get the best possible purchase price for your business, it’s important to remember that the terms of the deal matter too.
For example, let’s say Buyer A offers you $1 million for your business, and Buyer B offers you $750,000.
Buyer A ($1 million) wants you to take out a seller note of $700,000 that will be paid out to you over the next 10 years.
Buyer B ($750 k) has the cash on hand to pay for your business flat out on the day of closing.
Sure, Buyer A is offering more money. But you have to consider the time value of their offer.
Even though those payments might be more tax efficient, they will likely be worth less over the next ten years. Those payments also come with the risk of the buyer going bankrupt and not being able to pay at all.
Focusing completely on purchase price could also cause you to agree to unfavorable terms, and put your business in the hands of someone whose values and reputation don’t align with you and your company.
You probably have an established role in your community, and you’ve likely built great relationships with your customers, employees, and suppliers. If a buyer is offering the highest purchase price, but you don’t feel confident that they’ll take care of those people the way that you have, then that’s something else to consider.
Mistake #6: Not Utilizing Professionals
One of the biggest mistakes you can make when selling a business is foregoing the opportunity to seek out and hire the professionals you need to get a deal done.
The most common reason that business owners skip out on hiring these professionals (an M&A advisor or business broker, CPA, and an attorney) is because they see it as too great of an expense.
Yes, professionals charge for their efforts to sell your business. But if you find the right ones to work with, they can get you a purchase price and terms that you wouldn’t have been able to achieve on your own.
Mistake #7: Poorly Timing the Sale
One of the most crucial parts of selling your business is getting the timing right. Mistiming the sale by holding on too long can negatively impact the offers you get.
Timing the sale of a business isn’t easy. In fact, it’s nearly impossible to pinpoint exactly when you should sell until after the business has gone through its whole life cycle. Hindsight is 20/20, right?
It’s usually better to sell too early than to sell too late. We’ve seen several business owners lose out on a few million dollars because they got a little greedy and held off on selling.
While they believed that their earnings were going to continue to grow at the same rate or even stay consistent, their companies did not perform as expected, which significantly lowered the amount they could sell for.
Even if greed isn't affecting when you decide to sell your business, there are other timing factors that can hurt the outcome of your sale.
You may have your heart set on retirement in five years and want to wait until then to sell. But, there's always the chance your business won't be worth as much five years from now, so selling earlier than you originally planned could help you get a better purchase price.
Whatever your reason may be for waiting to sell your business, don't make the mistake of holding out so long that your business's value drops to a number that makes you regret your choices.
Mistake #8: Not Preparing for a Management Transfer
Some business owners have a role in virtually every aspect of their company. While it’s certainly impressive, it doesn’t bode well for selling your business.
Remember, when you complete your post-acquisition training period, the new owner needs to feel confident that business can continue as usual. It’s hard for them to feel that way if you were the glue holding everything together.
For this reason, it’s important that you start thinking about ways to offload some of your responsibilities onto some of your key employees.
If you don’t feel like they’re ready, then you should spend considerable time training them.
Mistake #9: Prolonging the Deal
You’ve probably heard the saying “time kills all deals.”
Nothing could be more true when selling a business.
Just because a buyer has expressed interest in your business doesn’t mean they’ll be on the hook forever. If you're unresponsive or uncooperative throughout the due diligence process because you think buyers will hang around forever, you'll probably lose their interest and have to start back at square one.
Now that you know more about the most common mistakes business owners make when selling a business, you can start to prepare.
If you’re still unsure of when you should sell your business, check out our blog “When Is the Right Time to Sell Your Business?” In it, we discuss the most common reasons that owners sell and help you to understand when the time is right for you.
Throughout the selling process, it’s hard to get everything right. Emotions run high, earnings fluctuate, and obstacles arise. These things are impossible to avoid completely, but being aware of some of the mistakes to avoid can help keep your deal on track and maximize your purchase price.
If you have questions about any of the content above, feel free to contact us today. We’d be glad to share some of what we’ve learned throughout the years and help you avoid some of the mistakes that previous owners have made.