Ten Common Mistakes Business Owners Make When They Sell a Business
Selling a business is complicated, and is as much of an art as it is a science. Owners who sell a business, whatever the reasons, tend to make one or more of the same kinds of mistakes. This is particularly true of first-time sellers, though even experienced sellers get tempted to fall into some of the same common traps.
Here are 10 of the most common mistakes owners make when selling a business and how you can avoid them:
1) Missing the boat. You know you want to retire in 5 years. Until then you want to continue working and building your business so that you have a strong platform to present to a prospective buyer. When is the right time to put your business on the market?
It’s impossible to accurately predict the amount of time it’s going to take to sell a business. It will depend on numerous factors, including your type of business, how much it’s worth, how your industry is faring in general, the state of the economy (locally and nationally), your reputation in the community and market and more.
The fact that you know you want out within five years is a good start. Many professionals advise that you start thinking seriously about your sale plans at five years before you want to be finished. This doesn’t necessarily mean that you are going to list it right away, just that you should start making pre-sale plans.
You can safely assume that it will probably take between one and three years to sell your business. If you list too early, you might be out of work before you’re ready to move on to the next phase of your life. If you list too late, you might be working longer than you want to.
The right time to list your business is often around three years pre-retirement or your targeted exit date. However, you should consult with a professional business broker who understands your type of business and the local economy. Together you can decide on the right time to list so that you don’t miss the boat that will take you to the next phase of life.
2) Not seeking professional help or advice. While it’s possible to sell a business without hiring a broker, it’s not always advisable. You should at least sit down with a professional whose knowledge of the business market is going to be much more extensive than yours. Even if you decide not to retain his services to produce the sale, at least you will have some direction on how to proceed with selling.
3) Attaching emotional value to the price tag. Business owners pour their souls and their lives into their businesses. Thus, when it comes time to sell, they have trouble separating their emotions from the equation.
There are subjective formulas for arriving at a reasonable selling price for a business based on assets, liabilities and income. Emotion and attachment should not influence the price tag. If they do, it can take you significantly longer to sell your business.
4) Leaving too much room for negotiation. Business owners expect prospective buyers to negotiate the price tag. This leads to the temptation to price the business higher than what it’s really worth (remember those subjective formulas?). It makes them feel as though they have some “wiggle” room when it comes to making the sale.
The problem with pricing a business on the high side is that it can scare off potential buyers. They may see your advertised price tag and immediately eschew the whole idea. (If your business has been on the market for a few months and no one has come to look, that might indicate it’s priced too high.)
You need to get prospective buyers in the front door, and that means you need to avoid the temptation to price your business high. There are lots of ways that you can negotiate with a prospective buyer that have nothing to do with the selling price. Instead of planning for negotiating on price, plan to negotiate with other tools, like assets, time or payment flexibility. This is a much better strategy than scaring off potential buyers with an expensive price tag.
5) Selling to a family member who isn’t as committed to your dream. It’s a noble thing to want to pass your business on to a family member. However, if that family member isn’t as enthusiastic about your business as you were, it may spell disaster for your business. If part of the payment for the business hinges on its future success, then you may end up losing a lot of money along with your dreams. Not only that, but you can seriously strain family relations in the process, perhaps even to the degree that the relationship is beyond repair.
So think long and hard before you sell your business to a member of the family. Make sure you are both clear on intentions, the terms of the sale and your collective futures before proceeding.
6) Failing to sign a confidentiality agreement. You don’t have to call in a lawyer every time a prospective buyer drops in for a look. But you do need to avoid any kind of talk resembling negotiations until you and the prospective buyer sign a confidentiality agreement. Letting out too much information before you do can damage your reputation, hinder the deal or increase the overall time that it takes to sell.
7) Talking too much. You might feel as though it’s okay to talk to your friends and family about the sale of your business. Owners generally think that their information is safe among friends, but this is not always the case.
The adage “loose lips sink ships” was coined for good reason. Avoid casual discussion of the sale of your business with anyone outside your immediate family. It will preserve both the integrity of your business and your relationships.
What if you want to approach friends or family to sell your business? If you should choose to approach friends or acquaintances with a serious proposal, refer to the previous point and make sure that, together, you sign a confidentiality agreement.
8) Omitting paperwork. Like it or not, you need to have your ducks in a row before you list your business for sale. There’s a lot of paperwork to track down, and it may take some time to find it all and put it together in a presentable portfolio for potential buyers. But it’s a necessary evil, and in the end it will go a long way toward making the sale of your business faster and more efficient. Don’t list until you have ALL of your paperwork.
9) Not understanding your paperwork. If you’re like most business owners, you’re not an accountant. And though you most certainly have a good handle on how your business is doing financially, you may not necessarily understand how to interpret all of the numbers on your financial statements.
You can count on being asked a lot of questions by a potential buyer about your financials, so you need to make sure that you understand it all yourself. This might mean sitting down with your accountant and going over everything, line by line. It may be tedious, but it will be time well-spent when it comes to negotiating the sale.
10) Not advertising, or advertising to the wrong market. Advertising that your business is for sale is a MUST, but it must be done correctly. This will protect your reputation and the future of the business as well as any potential buyers.
Few business owners would argue that advertising is necessary. However, many business owners don’t know exactly how and where to go about this. If this is the case, you should consult with a business broker, at the very least, or retain one to act as your selling agent. Not only will he have access to an entire market of buyers, he will probably have other insightful suggestions about places to advertise that you are selling a business.