So you think you want to sell your business? Before you speak to a buyer, before you sign an engagement agreement with a broker or Investment Banker, or before you even consider accepting an offer to sell your business, you need to ensure you are properly prepared to move forward.
After 35 years of helping buyers and sellers of businesses like yours, we at CFA-MidWest have witnessed first-hand just about all the mistakes business owners make when they go to sell their businesses. Based upon our experiences, we developed a list of The 10 Biggest Mistakes Business Sellers Make. This month, we will review the first three of these 10 mistakes. In the next two issues, we will review the rest of the list. Please note: the list is not in order of importance.
Mistake #1: Not Mentally Prepared to Sell
There is a big difference between being ready to sell and being prepared to sell. In our experience, many owners are ready to sell but few are truly mentally prepared to sell.
My father, Morley Zipursky, who founded CFA-MidWest in 1980, is fond of saying, “The single biggest mistake business sellers make is not being properly prepared to sell. Selling your business is more than putting a ‘For Sale’ sign out front.”
Many industrial psychologists believe for the business owner, selling a business is as emotional, gut wrenching, stressful, and physically and mentally demanding as running…and finishing…a full marathon race. Just as world class marathoners train and prepare each day for their competitions, a business owner must be equally prepared to sell his/her business. If not prepared, you will not be able to finish the “race.”
I have often said, selling your business is simultaneously one of the most exciting and stressful times you will experience in your business. Sometimes, the successful sale comes down to a “survival of the fittest.”
How best to prepare to sell your business? First and foremost, you must be absolutely committed to the process of selling your business. During the business sale process, it is natural for you to have pangs of seller’s remorse; not to have any is unnatural. However, if you are not comfortable with the decision to sell, you can’t be prepared to sell.
How do you get comfortable with your decision to sell? Speak with your team of trusted advisors about the process; they have helped other business owners with this process. Quiz your friends who have sold their businesses. Chances are, they rode an emotional roller-coaster through the process; their own experiences will help you prepare for what you will face.
Back to our marathon analogy: Selling your business is a marathon, not a sprint. You need to be prepared to run the entire race and also to handle the peaks and valleys of the process.
Mistake #2: Know Why You’re Selling
Once you are mentally prepared and comfortable with your decision to sell, avoid the 2nd mistake business sellers make, not having a clear picture of why they are selling their business.
Contrary to popular belief, the first question buyers ask us about our selling clients is not: “What’s the price.” Rather, it is, “Why is your client selling their business?” The reason this is a critical question is buyers are concerned about what we call the “edge of the cliff” syndrome. That is, buyers think the owner is selling because as soon as the business is sold, its revenues or earnings will “fall off the edge of the cliff,” so to speak. Buyers think/assume owners are selling in order to “get out before something bad happens to the business.”
You must be able to clearly and concisely explain to an acquirer why you are willing to sell your business. Simply stating, “Because you called me to see if I’d sell,” is generally not going to give a buyer a warm-fuzzy. Similarly, if you’re 45 years old and in good health, declaring you want to sell for “retirement and estate planning purposes” may bring glassy-eyed stares from potential acquirers.
Buyers seek honesty from sellers. If you are not honest with yourself regarding your reason for selling, you will not be able to succinctly articulate your reason for sale to a buyer.
Mistake #3: Not Knowing the Value of Your Business
My last three articles dealt with the subject of valuing your business. If you plan to sell your business, not having an idea of the real value of the company is one of the single biggest mistakes you can make.
In our experience, we have seen many transactions fail because the seller had no real idea as to the value of his/her business. Just because the buyer contacts you and makes an offer does not necessarily make it a good…or bad…deal.
Recently, we received a call from the owner of an imaging supplies distributor. He’d been contacted by a buyer who offered what the owner thought was a very fair price. After a review of the seller’s financial statements and learning more about the business, we were able to show the owner the buyer’s offer was about 50% of where it should be. The seller rejected the buyer’s offer, engaged CFA to run a process, and we ended up selling the business for almost 2 ½ times more than the original offer …to the same buyer who made the initial offer. Our client thanked us for helping him see how much money he could have left on the table.
In order to even know if you will receive a fair offer for your company, you must have a realistic idea what your business is worth before you enter the market to sell it. Consider this: would you approach a customer about buying the products or services your company sells without a clear idea of what it costs you to produce or sell your products or services? Of course not!
For this reason alone, it is absolutely imperative for you to know the value of your business before you try to sell.
Therein lies the first three of our 10 Biggest Mistakes Sellers Make When Selling Their Businesses. Next month, we’ll cover three more of the 10 Biggest Mistakes.
