07 Feb 20 Ways Business Owners Mess Up When Selling Their Business
Some things shouldn’t be rushed. Selling a business is one of them. Speed kills—failing to take the time to prepare for and sell your business could cost you the very lifestyle you have worked so hard to build.
The rules of the business highway work to protect and benefit travelers in both directions—buyers as well as sellers—and sellers who ignore them, innocently or intentionally, usually end up losing time and money.
What Not to Do When Selling Your Business
- Fail to prepare for the life you want when you leave your business
What to do: Start thinking about the life you want once you leave your business. Will you have enough money for what you want to do next? What will it take to get you there? Our business is usually our largest asset. A professional appraisal will tell you what your business is worth now and its most probable selling price. But just as important to your planning, you also need to understand the amount you’ll net after adjustments and taxes.
A team of professionals (i.e. business broker, accountant, tax lawyer, wealth planner) can then help you build a roadmap for increasing the value of your business and taking advantage of tax strategies to maximize the proceeds of its sale.
- Tie the success of the business to your efforts
What to do: Buyers want to know that they can step in with resources in place to keep the place running when you’re gone. Make yourself replaceable. Put in place people and systems so the business is less dependent on you.
- Imply that learning how to operate the business is hard
What to do: Complexity scares buyers. Buyers need assurance that they can learn to run your business in a reasonable time and that you will be there to help them through the transition process.
- Start putting your paperwork in order after you meet a potential buyer
What to do: A keen buyer will want to act right away but will lose interest after weeks of delay while you assemble due diligence material. They’ll assume that your business is disorganized, too. Be prepared with financial documents that are accurate and up to date. Your broker can advise you on what is needed early in the process so you are prepared. Updates can always be provided as required.
- Blab to others that the business is for sale
What to do: The value of a business drops once word that it is for sale is out on the street. Employees, suppliers and customers get nervous. Respect the need for confidentiality. Business brokers have protocols in place for advertising, disclosing information and handling buyers in order to protect the seller and their business. The shorter the time frame to sell a business, the less chance of word slipping out.
- Hide why you are really putting it on the market i.e. burnout, health issues, family issues
What to do: Be honest. There is nothing wrong with burnout, or health or family issues but you have to be upfront about it. Buyers need to understand what they can do with the business. If you have lost the passion or energy to devote to the business, tell them. Maybe you weren’t very good at delegating. The buyer may be better at management and can get the business running smoother. Never try to hide deficiencies. Profits are being generated with weaknesses present; fixing them will increase the profits.
- Overstate the value of assets
What to do: Sellers are inclined to paint a rosy picture. But in estimating the value of tangible assets they need to be as accurate as possible. The facts will come out at due diligence. If the truth has been stretched in even one area, the buyer won’t believe any of the values being presented.
- Misrepresent the presence and use of systems in the business
What to do: Again, do not misrepresent information. The seller has to inform the buyer about the systems—how they work, how they are understood and used. An operations manual that’s current and accurate will be worth its weight in gold to a new owner. But a manual has to reflect what employees are really doing.
- Stop doing what you would do in the normal course of business i.e. cease marketing or the maintenance of equipment
What to do: The buyer’s offer was factored, among other things, on a realistic market value of the assets and liabilities and the true earning capacity of the business. Say, for instance, you stopped marketing and that affected future revenue. What will the buyer think or do if the business doesn’t meet the numbers that were forecast? They won’t be happy with a deal that’s suddenly generating less money than they thought. They might even take legal action. A seller’s focus needs to be on running the business to keep it in top shape while the broker is selling it for them.
- Deal directly with the buyer
What to do: Free-flowing conversation is dangerous. Run all conversations through your broker. The buyer will be looking for a reason not to buy. Don’t give him one. Loose lips can sink business deals as well as ships.
- Discount the advice of your business broker, assuming your lawyer or accountant know best
What to do: Choose the right professionals— experts who have actual experience in buying and selling businesses and who understand their role in the process. Most lawyers and accountants are not entrepreneurs or business experts. Because their job is to protect your interests against all conceivable risks, the safest recommendation they can make in every situation is to not take a risk. Business brokers are trained to sell businesses! Rely on their expertise to negotiate well and create win-win terms that work for both parties.
- Disrespect cultural differences
What to do: Emotions can run high during negotiations. Give and take, and the need to listen to, understand and respect the other party’s position, is needed on both sides. Be sensitive to cultural differences—acceptable protocol varies by culture so the potential for misunderstandings and strained relations increases. Let your broker do the negotiating. He or she understands the cultural differences. And you need to maintain good relations with the buyer as you will have to work together after the deal is done to provide for smooth training and transition.
- Battle over trivia
What to do: Delays kill deals. Don’t sweat the small stuff and don’t get into a contest of wills, where one side (i.e. you) “wins’ and the other “loses.” If the deal does not work for both sides it will not work at all. Know the deal breakers that must be addressed for the sale to go through. Aim for a win-win conclusion by offsetting each of your necessary demands with a compensating buyer advantage, and by working together to address the issues necessary to meet both your objectives. Again, rely on the professional expertise of your broker to negotiate well and create terms that work for both parties.
- Balk at seller financing, nervous about risk
What to do: Most buyers will need the seller to finance part of the purchase price. Seller financing can add as much as 30% to the price of your business and you get interest on top of that. Sellers can be nervous about the ability of the buyer to run the business successfully. A training program to equip the new owner to operate the business successfully and ensure a smooth transition can make the difference. You are safest lending 50% of the purchase price to the buyer and being in first position on everything, rather than lending 30% and being in second position behind a bank. Other issues affecting the business and loan i.e. illness or death of the buyer can be mitigated with insurance.
- Push the buyer for action before they are ready
What to do: Fundamentally, buyers require a business that provides a living wage and enough income to service debt and produce a sufficient return on the capital they invest. But, as in other buying decisions, there is an emotional component involved. Buyers are individuals purchasing not just numbers and profits, but a lifestyle with all of these contributing factors.
Before the buyer is ready to move forward to due diligence, the seller has to give the buyer the full picture of their business—a meeting of the minds around the rewards the buyer stands to gain with business ownership—so that he or she falls in love with the idea of owning the business and its ability to fulfill their personal objectives and lifestyle aspirations.
- Hold unrealistic expectations
What to do: A seller’s expectations need to be in line with the market reality when it comes to the most probable selling price (MPSP) of their business and how long it takes to sell. The MPSP represents what the business would sell for on an open market as is, in use, in place. The MPSP represents a reasonable price, factoring the true earnings, the state of the business, the risks and what the market is willing to pay. For many sellers, though, it means their business is not worth as much as they thought.
- Hold out for a better offer
What to do: A business is only worth what a buyer will pay and what a seller will accept. Sometimes an early offer is the best. I’ve seen a seller get a good offer for their business within two weeks of it being on the market, then turn around and put on pricing conditions that end up killing the sale. Nine months later, they are wondering why it hasn’t sold—until they realize it wasn’t underpriced to start with. The broker knows the market and the thinking of both parties. Respect their advice.
- Make commitments before the deal is closed
What to do: Most North Americans are new to the process of selling a business. After negotiations are completed, they think the deal is done when it’s not, and in their excitement, they start making commitments for life after the transition. This is a big mistake as it puts the buyer in a leveraged situation that some will try to take advantage of. A seller who then refuses the buyer’s “new” offer at the last minute is left in a bad position due to commitments they have already made. Don’t make any commitments until the deal is closed.
- Overlook insurance to mitigate risk
What to do: What would happen to your loan and investment in the business if the purchaser were to get ill or die? Insist on a critical illness policy on the buyer with sufficient benefits to cover the payments on the loan you’re providing. Also insist on life insurance on the purchaser sufficient to pay off the loan if they die. Obtain insurance on yourself to make sure that the buyer receives sufficient proceeds to enable them to survive in the business if you (seller) can’t deliver on the training/transition program. As the assets of the business usually secure the loan, a prudent seller will insist upon a commercial insurance policy in place to protect these assets against, fire, flood, theft and other losses. Liability coverage is also essential. A prudent business owner should have these protections in place whether they are selling the business or not.
- Leave telling the landlord to the last
What to do: Never assume that the landlord will approve the transfer or assignment of a lease to the buyer. A business broker will speak to the landlord as early as possible, but only with a signed Non-Disclosure Agreement in hand. Deals can fall apart because of landlords’ refusal or slow processing of lease assignments.