Selling a Business: Mistakes Sellers Make
Business owners trying to sell their own business are like dentists trying to reset their own broken arm. Just because you may be good at one thing doesn’t automatically make you good at another – especially when that “other thing” requires a good deal of training.
We advise business owners and brokers on this all the time. The former on what mistakes to avoid; the latter on how to advise their own potential clients on the pitfalls of “do-it-yourself” business brokering.
Those mistakes are among the many reasons to call in a professional – whether you’ve broken your arm and want to have it reset or you’re ready to retire and want to sell your business.
Selling a business ain’t for sissies. You’ve got to know what you’re doing and have the time to do it. I’ve never met a business owner with the knowledge and the time to properly market and successfully sell their business.
But they make all sorts of mistakes in the process and we’ve seen a ton of them over the years.
Many of these mistakes pop up so often that we’re able to provide a proverbial “greatest hits”. This post highlights the five most common mistakes business owners make when trying to sell their own business – and a discussion of these mistakes should make up a good portion of a professional business broker’s early conversations with any business owner that the broker is considering representing.
1) The Price is Probably Wrong
Since starting Worldwide Business Brokers back in 2001, I’ve never encountered a business owner that has a realistic opinion of the value of their business.
Anyone who has followed this blog for any period of time knows that the biggest reason why businesses don’t sell is that the price is too high. Business owners almost always have an exaggerated opinion of the value of their business and if they bring their business to market at a price that reflects their “exaggerated opinion”, their business will likely be one of the 80% of businesses put up for sale that don’t sell.
If you’re a business broker discussing the mechanics of a marketing effort with a potential client, advise them to at least get a valuation done.
If you’re a business owner and if you’re serious about selling, find out what the market suggests a buyer will pay for your business by getting a broker that knows what he or she is doing to establish your business’ approximate value.
Find out what businesses like yours are selling for in the current market – and never believe anything you read in any trade magazines regarding valuations.
We’ve launched a coaching program specifically tailored to Realtors that want to sell businesses and to novice business brokers.
If you’d like to learn more, email me at joe@WorldwideBusinessBlog.com
2) The Owner Fails to Identify the Type of Likely Buyer
There are different kinds of buyers for different kinds of businesses.
From private equity groups and family offices to high net-worth individuals and couples or singles trying to replace a job, different businesses will appeal to different buyers.
And each of those groups generally fall under one of two categories – financial buyers and strategic buyers – with some landing in both. How a business is marketed is determined first by which of the two categories the buyer is likely to be in and then which of the groups include the most likely buyers.
To realize the highest value, you have to know what a business provides to certain groups of buyers; that is, what they value the most.
Different buyers will pay different amounts for the same business. Some will place the highest value on the net income while others will pay more for a proprietary asset such as a customer list or special technology.
You need to know which buyers are most likely to be your buyers before you can begin to target them.
3) The Owner Doesn’t Know How to Find Likely Buyers
Finding the right buyer – one who is most likely to pay top dollar for a business – isn’t as easy as running an ad in a trade magazine or newspaper to see who turns up.
You want to know who has the money to buy, who has the talent to continue to grow the business and, the hardest of all, who is serious.
Selling a business takes a lot of time and attention to detail and any time a seller spends on the selling, is that much time the seller doesn’t spend on the running. Remember, time is money, and buyers are generally playing with the seller’s time and money.
An owner that tries to sell his or her own business risks the value of that business falling. And to relate this to mistake #1, above, if the seller starts out with an inflated opinion of the business’ value and, during the course of trying to sell the business, the value drops, you can easily imagine a business that will never sell and an owner that will never realize the value of all his or her hard work.
4) The Owner Expects a Quick Sale
Selling a business is a process, not an event.
Any professional broker will tell their client that selling a business involves a structured process that takes time – generally between six and 12 months from listing it for sale to closing the deal. In fact, many deals involve a variety of post-closing requirements of the seller that can extend the ultimate closing – the day the seller actually walks away – for many months, and sometimes years after the parties meet at the attorney’s office to settle the deal.
Few business owners recognize this fact.
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And this is related to #3, above, about finding the right buyer.
A business owner that tries to sell his or her own business will spend 20%-30% of their time trying to sell – rather than run – their business. And even if properly priced, imagine what could happen to the business’ value if the owner spends that amount of time for 10-12 months trying to get it sold. And further imagine the potential for the business suffering – and losing value – because the owner has to take their eye off the ball for that much time.
Selling a business is a very detailed process that few – if any – sellers are able to pull off without the guidance of a trained professional – one who does this for a living.
5) The Owner Has Involved the Wrong Advisors – or No Advisors!
As in most of life – with the notable exceptions of Solitaire and solo piano concerts – selling a business is a team sport. You have to assemble the right team to get the job done.
If a seller doesn’t have the right players in the game, the chances of winning drop dramatically; in the case of selling a business, to about zero.
What is the right team?
An attorney who has experience in business transactions and understands how to structure deals – not the guy that handled your divorce or kept your kid from having to attend a months-long sobriety class as a result of having that extra beer at the after-prom party three years ago.
Enlist an accountant who has a reputation for giving accurate tax advice and recommendations on how to structure the sale, even as they know that with a successful sale comes the possibility they will lose the business’ account.
And, at the very beginning, bring in an experienced intermediary who has successfully closed deals before – preferably one with working knowledge of the industry the business is in.
The Bottom Line
All business owners think about selling their business at one time or another. However, for the ones who decide to go forward and sell, there are certain mistakes that must be avoided if they want to have a successful transaction and get the most money for their business.
The five listed above are common mistakes that business owners make when they try to run their business and simultaneously put on the hat of someone who has been trained in the practice of brokering businesses. The first step in avoiding these and other mistakes is to hire a professional intermediary.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.