For many business owners, the sale of their organization culminates a lifetime of work. While it can be the most rewarding sale you’ll ever close, it can be very disappointing if it doesn’t go as desired.
The keys to achieving a successful sale are advance planning and avoiding mistakes that can have an adverse effect on the outcome. In part one of two installments, we offer some key mistakes to avoid.
Running the business to pay no taxes—Too many business owners have fallen into this trap. The problem here is that the only way to legally pay no taxes is to have no profit. This leads owners down a path where the business model morphs into one that allows expenses to balloon out of control. We’ve worked with clients who want to rein this in prior to a sale but find it difficult to do. It’s hard to turn off the spending spigot. The most valuable businesses are profitable; they show profit and they pay taxes prior to the business sale.
Taking business value advice from peers—Many business owners’ peers share their beliefs on valuation formulas. Too often, business owners take this advice as gospel and use it to model the value of their business. In my experience, the value arrived at is nearly always well above the true market value. There are many moving parts to a business and a business valuation. Knowing the general models acquirers use can be helpful, but it doesn’t replace professional valuation. Moving forward with the sale process with an inflated concept of value can be devastating. The business owner is often left with little choice but to accept an offer that’s below his or her needs.
Engaging the first unsolicited offer—In this time of unprecedented merger and acquisition activity, nearly all business owners are getting offers to buy their business. Too often, out of a lack of knowledge and confidence in the process, they jump on an unsolicited offer. Lack of experience in the sale process makes them easy prey for experienced buyers who paint a rosy picture of the sale process. A successful business sale starts with having the right fit. Moving forward with the first suitor prevents many owners from finding and engaging with an acquirer that could be a much better fit with a significantly higher purchase price and better terms. We’ve closed many business sales in which the offers received from different suitors were hundreds of thousands or millions of dollars apart.
Not having your books in good order—Having worked through hundreds of business valuations and sales, I’ve seen firsthand the wide range of financial tracking and reporting processes employed by dealers and resellers. Too often, the financials aren’t utilized as the management tool they could be. In these cases, the income statement and balance sheet are rarely reviewed—they’re simply reports that are sent to the accountant at the end of the year to complete the required tax returns. This leads to inaccurate data, unclear reports and data that’s difficult to analyze. Common examples include revenue not being booked to consistent, easy-to-understand accounts (making analysis of revenue centers difficult), costs of goods sold all lumped together (preventing gross profit calculations) and balance sheets with legacy accounts that have been there for years with no change. Having clean, easy-to-follow financials gives buyers a comfort level that leads to increased willingness to engage and increased value. On the other hand, I’ve seen deals fall apart because the books were a mess, and the buyers couldn’t get comfortable with the data. A review and clean-up of the financials, if needed, should be done prior to engaging with buyers.
Thinking you can go it alone—Many business owners have tremendous faith in their negotiating skills. This confidence often leads them to feel they can handle the sale on their own. The problem is that it’s a very technical process and success requires in-depth knowledge. I’ve heard many owners compare it to the sale of real estate. Nothing could be further from the truth. A business sale is much more complex. All aspects of the sale and legal documents must be negotiated. This goes far beyond the price and payment terms. For example, a misstep in the allocation of the purchase price could cost the seller tens of thousands of dollars in taxes, though it would seem unimportant to the novice as it has no effect on overall purchase price. Due diligence is another aspect many business owners aren’t prepared to navigate. There will be a tremendous amount of data required, and it must be presented properly to protect the seller. The list goes on and on. In a typical business sale, we invest hundreds of hours in the process, ensuring the best outcome for the seller.
Understanding these common mistakes and avoiding them will have a positive impact on the sale of the business. The key is starting ahead of time—prepare for a business sale at least three years out. While a business may be sold without that preplanning, it’s not ideal. Avoid these mistakes and you’ll reap the rewards.
