9 December 2024: Selling a Business:
Pitfalls to Avoid
Are you selling a business? Whether you’re the owner or the business broker, there are a number of common pitfalls that, if not avoided, have the potential to doom your efforts from the start.
Selling a business is a process. Preparing a business for sale takes thorough planning, and many people ignore some of the significant issues and neglecting any of them can complicate the process. This is where a professional business broker can offer strategic advice on when to exit the business and use their relationships to make the selling process smoother.
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Bringing in such a professional will also help you avoid some common pitfalls — i.e., poor preparation, lack of financial coherence, poor planning for transition, etc. — which discourage buyers and make your business less attractive. With professional help, you’ll be able to attract qualified buyers for a proper exit from your business.
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But even with a good strategy in place, common mistakes can easily derail the selling process. Knowing these pitfalls in advance – and specifically addressing them before coming to market – can help you steer around them even during a taxing sale.
• Unclear exit goals: Does the seller have “sell-by” date? That is, do they want to be out within a certain point in time? Does the seller have an expectation of price that relates to the business’ value, or does the seller want significantly more that their business is worth?
Is the seller aware that there will likely be some seller financing as part of almost any deal and are they willing to listen to any legitimate offer and consider all terms before resp0nding? Or have they said “no” to the concept of seller financing. If you’re a broker, have you explained that about 80% of all small business transfers include some aspect of selling financing?
Is the seller aware that in most cases he or she will be required to stay on with the business for some period of time post-closing? Smart buyers will want a smooth, nearly invisible transition which, depending on the complexity of the business, may mean the seller staying on for months.
Without clear objectives, you may undervalue your business or sell to the wrong buyer, leading to dissatisfaction with the outcome.
• Incomplete due diligence: One of the most significant problems that arise when business owners fail to perform their own pre-selling due diligence is that the buyer’s due diligence turns up all sorts of financial clutter that could have been avoided if the seller was paying attention. Superfluous and negative data on the balance sheet is a big one as it can risk confusing the buyer leading to questions and suspicions that would never arise had the seller addressed this clutter early on.
For example, carrying uncollectable receivables or outdated inventory does nothing but raise alarms in the minds of buyers. Clean up the balance sheet before bringing a business to market by writing off uncollectables and obsolete inventory, settling disputed amounts with vendors and clients, paying or collecting any loans made to or given by the owner(s) and by all means distribute any excess cash.
Failing to resolve such issues or incomplete financial disclosures can scare off buyers or lead to complications later in the sale process.
• Overlooking Financial Projections: Have you been realistic as to what should be expected from your business in the near future? Has the business gained or lost a major customer or client? Are certain valuable protections such as existing contracts or patents coming to an end? Are the key employees tied to the business for reasonable future period via employment contract?
Buyers will scrutinize your financials. If you haven’t addressed any inconsistencies or issues, you may face delays or a lower valuation. But buyers will also scrutinize the aspects of your business that drive those financials, which, in turn, drive the business’ value.
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Courses! Courses! Courses!
Many of you have asked if our Flagship Course, “Learn How to Value and SUCCESSFULLY Sell Businesses“, could be made available on a module-by-module basis. We’re happy to report that this is now possible.
We’ve broken our Flagship into six separate modules (or module groups) to give you all the flexibility you need to learn only what you want to learn – and we’ve moved them all over to the new Brokers Academy in The Brokers Roundtable℠ . The Flagship is still available but the modules are now available individually.
You don’t need to be a Member of The Brokers Roundtable℠ to access any of these courses but if you are, you’ll receive a 20% discount on the cost of any course you enroll in. If you’re not yet a member of The Brokers Roundtable℠, you can learn more – and get access to all the talent and resources – here.
• Negotiations: Negotiation is an important part of wringing the highest value out of your business. Evaluate and understand the worth of your business through methods of valuation like the use of discounted cash flow and recent sales of comparable companies.
Of course, you have to have a pretty good idea what your business is actually worth to accomplish this and a professional valuation is, arguably, the most import tool to have in hand and Step #1 in the process.
As I write this, today’s edition of The Wall Street Journal contained a story about a professional baseball player for the New York Yankees having just signed the most lucrative contract in the history of professional sports – with cross-town, arch rival New York Mets, no less.! Now, Juan Soto, the player in question, didn’t negotiate that deal for himself. He hired a professional agent – someone who does this kind of negotiation for a living – to act as his representative. Juan is a professional baseball player; the agent is, well, a professional agent. They each stayed in their lane and, by doing so, each will benefit handily.
If you’re selling a business, hire somebody with the training and experience to increase the odds for the best outcome. Poor negotiation can lead to leaving money on the table or accepting unfavorable terms, impacting the overall success of your exit.
• Lack of transition planning: Does the seller have a plan for life after selling? Does the seller have a plan for mitigating the tax impact of the sale? Does the seller understand the importance of how the transaction is structured so that the potential for seller’s future liability is reduced, if not eliminated.
The importance of knowing what comes next and how to protect the seller financially and legally cannot be overstated. If you don’t have a clear transition plan, the possibility of adverse financial and legal consequences becomes more significant.
The Bottom Line
Selling a business is usually the most significant financial event in the life of the seller. Judging by the number of mistakes we’ve seen sellers make in the lead-up to trying to sell, it almost seems that they’re approaching this task with much less attention than is required.
The issues discussed above are not a complete list of the potential pitfalls sellers often get tripped up on. This suggests that smart sellers would be wise to act like Juan Soto; hire the right talent to provide the best chance of hitting the proverbial “home run”.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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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.
Joe
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 600 in the world. He can be reached at
jo*@Wo*******************.com