Avoid These Mistakes When Selling Your Business
By Jigar Desai
During the COVID-19 pandemic, many business owners are being forced to close their operations and sell their business. Business owners might be selling their businesses for various reasons, including lack of profit, retirement, change of operations. The process of selling a business can be long and tricky. Business owners, who are in a rush to sell, may make a few mistakes that they regret after the sale. We created a list of common mistakes business owners make when selling their business.
#1 Not Planning Ahead/Waiting Too Long
The majority of businesses that are for-sale do not sell; Forbes states that 90% of businesses listed do not sell. Business owners are often consumed in the day-to-day business and forget the long-term exit plan of the business; this is especially common during COVID-19. Many owners also fail to make a proper exit plan because they envision themselves retiring and sell their business after a few years. However, a business sale does take a few years to complete, so preparing now is the best strategy.
Crucial business documents are analyzed prior to making a sale; these documents often determine the price of the business. That’s why it is important for business owners to keep their business records as updated as possible. It takes about one to two years to sell a business, so it is crucial to have the necessary documents ready when a potential buyer arrives with an offer. A business owner may not know when someone may arrive with an offer that is too good to pass. The duration of the sales process will extend, thus increasing the likelihood that the sale does not go through, if a business owner spends the majority of the initial sale period creating the necessary documents. In a similar manner, proper due diligence also requires an owner to handle other matters associated with the business. After preparing the necessary documents, an owner should settle outside matters associated with the business such as possible litigation or settlements. These issues cannot be hidden and will greatly affect the price of the business, even if they can be handled by the time the sale ends. Thus, long-term planning is essential for a successful sale of business, which begins by starting as soon as possible.
For many business owners who are making a profit, that may be the best time for them to sell their business. All business owners should have a proper exit strategy prepared to plan for a smooth departure. When a proper exit strategy is in place, ideally a business owner would sell their business at its peak profit. This is the case because the business is at its highest value and highest potential value, making a buyer pay a premium. This is especially the case during COVID-19, that a potential buyer will pay a premium on a business that is doing well during at a time like this. Business owners who are feeling burnout or detecting that a burnout will occur in the near future should prepare for an exit strategy now. Similar to selling a business that is not making a profit, a burnout business owner can represent desperation. A business owner that is desperate to sell their business is reflected in the price as it will lower significantly.
The economic conditions at the time of the potential sale should be considered. Ideally, a business owner would sell their business at a time that their industry is thriving. Like identifying a business’s peak profits, it is difficult to identify an industry’s peak. That is why it is important not to wait to long as the peak may turn in to a decline. Another factor that a business must consider is general economic atmosphere occurring in society. There will be more potential buyers during a period of low interest rates as potential buyers can find capital easier. During the COVID-19 pandemic, the government has incentivized businesses and potential buyers with low interest rates. It is wise that a business owner takes this time to plan their business strategy as it is expected that in general, there will be more potential buyers when the economy turns up as the pandemic issue becomes more resolved. Lastly, a business owner should keep in mind that a business’ value can decrease faster than it can improve making the prime business sale window even more crucial. The Business Exit has provided examples of business that have waited too long to sell.
#2 Assigning the Wrong Person to Handle the Sale
A business owner may be competent and has put countless hours into building a business into the success it is today. However, these efforts can diminish if the third-party handling the sales process is not prepared. It is common to have a lawyer and an accountant handle the sales process to cover the legal and business aspects. It is common to hire additional help to plan the exit strategy and to market the business. This can be done by a business advisor or a consultant, many of them offering a free consultation.
Although third-parties are involved in the sale of an owner’s business, no one knows your business better than the owner. Third-parties can resolve matters that occur outside of the business, but it is crucial for a business owner to continue to run the business as best as they can. As mentioned before, the sales process can be lengthy and a business owner is to run the business well until the sale is complete. The business owner is also charged with answering the questions the potential buyer has regarding the business; after all, the owner knows the business and market the best. A business owner should also be active in finding a potential buyer as they know which candidate would be able to run the business. Ultimately, there is more confidence in the sale of a business if the owner has active participation in it.
#3 Accepting the wrong offer
Even during the pandemic, there are many potential buyers that have enough liquid capital to purchase a business and are actively searching for one to buy. Many private equity firms are seeking businesses that are not generating a high profit right but will after the pandemic, thus will sell their business lower to get rid of them. These private equity firms are motivated by making returns for their investors, so their plan is to buy the business, then sell the business at a higher price. These firms usually call early in the sale process, hoping that the owner will accept a lower offer so they will not have to compete with other firms. They have the vast tools and capabilities to conduct research on a business and industry to identify one that is selling below its fair value. Their goal is to establish exclusivity and avoid leverage from the business owner. The biggest mistake a business owner can make is accepting an offer from a private equity firm that appears to be fair. When a business owner accepts the initial offer and starts the sales process, the owner losses leverage in the sale. This makes it difficult for the business owner to seek other offers and change buyers. As mentioned above, a business’ sale price is difficult to increase from the initial offer but can easily decrease. The “fair” offer the business received can quickly decrease into something they would not normally accept, all while losing the leverage of a bidding war. Apart from the price, accepting the first offer may lead to unfavorable terms for the business and its employees. Summit Advisory explains the goal of private equity firms and the risk of accepting the first offer.
A business owner should also not take an offer that is providing a fair price if the terms surrounding the offer are not right. A business owner should ideally turn down offers that offer with little or no money down, or provide seller financing. This maximizes the risk the owner has to undertake after the sale of the business. BizBuySell provides more information on seller financing. A business owner should wait to receive a good offer and on good terms for them,. During the pandemic, especially, it is unwise to take unnecessary risk.
#4 Proper Evaluation of the Business
The difficult problem of accepting the wrong offer can be prevented by knowing the correct value of the business. It is common for a business owner to receive a higher amount, once the sale has finalized or a scenario where a business owner wishes they could have changed a term in the sale. While it is impossible to change things in hindsight, a business owner can come into negotiations with a proper bar in mind that must be reached in order to sell.
Business owners frequently come into negotiations with the wrong value in mind. This can be more troublesome if the number in mind is less than the real value. A proper evaluation of a business starts with examining the business records and understanding the business’ numbers. Examining data such as its capital structure, costs, income and profits help identify the current evaluation of the business. An owner should also examine the near-future and long-term projections of the business to create a future evaluation. This can be done with the help of a lawyer or accountant. Sometimes, a business may be valued low due to its current business finances, but its high future profitability can greatly increase the ultimate selling price.
A complete evaluation comes from identifying whom the owner is trying to sell to. Different owners create different values for the business based on their goals for the business. This relates back to understanding current and future position of the business. A potential buyer that is seeking to come in and eliminate costs and drive the business into another direction is placing greater value in the possible profits. Other potential buyers may want to keep the current operations of the business. Understanding this concept can also help a business owner market their business, as they know which type of buyer they are trying to sell to. Axial explains this process detail.
Selling a business is a difficult goal to accomplish, as a business owner usually does not want to part with something that they built themselves. The selling process is also difficult because of its complex nature and the difficulty in predicting the right time to sell it. These difficulties can be alleviated with help from third-parties. However, a business owner should be prepared and updated in their business. We have listed issues that business owners commonly make. There are other things to look out for, but most mistakes can be prevented by proper research and strategy. This can be achieved by preparing during the pandemic.
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