Business owners should be aware of these 7 mistakes often made when selling a business:
1. Neglecting to run the business during the sales process.
The owner of a business can get so involved in the selling process that they slack off once the business is listed for sale and they neglect the day-to-day operation of the business. If your business drops off from its normal revenue and profit margins in the months prior to the sale, many times a buyer will want to back out of the transaction or negotiate a lower purchase price.
2. Failing to understand what creates “real” value of the business.
Businesses are valued based on the long-term consistent profitability that the business generates. The value of a business can dissipate quickly if a business is no longer profitable, and it can take years to build the value up. Most buyers, banks, and appraisers want to see the last 3 or 4 years of tax returns and financial statements to determine how much the business is worth to them. If you have one bad year that cannot be explained, this can dramatically affect the value of the business. You may have to wait for a couple good years to make up the damage caused to the business value.
3. Failing to keep the transaction confidential.
Most business owners feel loyalty to their employees. Some may even feel compelled to tell their employees that they are selling the business. This can create chaos that can affect the sale of the business. The employees will be concerned about losing their job, so normally it is best not to inform them until after the transaction is completed. In larger transactions ($50 million+), it is more common to tell key employees about the pending transaction because their help is needed to complete the transaction. Most of the time, the buyer and seller will pay these employees a retention bonus. The buyer will need your trained employees to maintain profitability after the sale.
4. No succession plan to minimize owner dependency.
Many businesses have owner dependency issues. If you are planning on selling your business, it is important to address this issue as soon as possible. If it is not addressed, it will affect the price someone is willing to pay for your business. Ideally, you would train employees to perform your duties to minimize transition issues when someone purchases the business.
5. Starting with too high a price.
Sellers obviously want to maximize their selling price, but if your asking price is too high, you will receive little activity and not much buyer interest in your business. The ideal buyer may be lost to another business for sale in the market because the asking price does not cash flow for the buyer. You may only receive interest from buyers who are not knowledgeable in business transactions or buyers who are willing to negotiate from an aggressive starting point, and aim to bring the purchase price down to an acceptable price.
6. Not looking at the business from a buyer’s perspective.
Buyers may look for different aspects of a business than those the seller looks for. For instance, growth potential, management depth, customer base diversity, return on investment, etc.
7. Waiting too long to sell.
Holding onto a business when you start to get burned out and have no time or energy to grow the business results in declining sales and profits. Buyers will always pay more for a growing business than a declining one.
Knowing when to sell and how to start that process can be a struggle. Having a team of industry experts and business professionals by your side to walk you through the process isn’t.
Call Gateway Mergers & Acquisitions now for a free, no-obligation pricing analysis at (972) 219-6961!