Deciding to sell a business is a complex and complicated decision. The decision is complicated by the fact that the seller is not just selling a business, they are selling everything they have created. Selling a business can have great rewards for the seller if the sale is done correctly. However, there is also a lot of pitfalls that can ruin the process. For sellers to have the best experience selling their business and achieve their ultimate goal, they need to be aware of the common pitfalls that plague the selling process. This article examines the common pitfalls sellers need to be aware of when they decide to sell their business.
Selling a business can be a muddled mess if it is not done correctly. However, the seller can have a much better experience if they are aware of the common pitfalls that occur when selling the business. Sellers need to be aware of the following pitfalls when they decide to sell if their business:
- Going Solo – Choosing to go through the selling process solo is one of the biggest mistakes sellers can make. sellers often lack the necessary tools and experience needed to sell their company in a way that will that will benefit them the most. When choosing to sell a business, the seller really should have an attorney, a business broker, accountant, and appraiser to work with. These professionals should be experienced in the sale of a business in order to ensure the seller is getting the best advice. By working with these experienced professionals, the process will be efficient and will help to optimize the outcome of the sale.
- Lack of Preparation – Preparing to sell a business is not a quick process and trying to rush the process will adversely impact the seller. Sellers need to spend adequate time preparing, most experts recommend a period of not less than six months, but closer to twenty-two months. Preparation time is important for the following reasons: time to properly prepare the business for the market place; time to increase earnings and improve the company’s competitive position; and ensure all financial documents and tax records are up to date and accurate. The pitfall in this circumstance comes when the seller is rushed and does not get a good deal.
- Taking a Hands-Off Approach – The seller needs to be actively involved in the process even if they have hired the right professionals. While the hired professionals will work diligently to sell your business, they do not have the personal motivation the seller has to sell the business. While the seller should allow the professionals to do their jobs in order to be effective, the seller needs to ensure they are actively involved in each phase of the sale in order to ensure they are getting what will work for them.
- Lack of Valuation Strategy. Buyers are going to question the asking price for a business. The seller needs to be prepared with evidence to support how they have determined the value of the business. As a part of this strategy, the seller should hire an independent accounting firm to audit and certify the books. By having an accounting firm audit the books, the buyer will have more confidence than they would by only having the word of the seller.
- Overconfidence – Confidence is never a bad thing. However, when selling a business there is such a thing as overconfidence. Overconfidence in the success of selling the business can cause the seller to neglect necessary and important steps that will make the selling the business a reality. Overconfidence can also impact the reality of what the business is actually worth. Sellers need to be aware that just because they want the company to be worth top dollar, it does not mean it is necessarily accurate. The seller needs to be confident but avoid overconfidence. By avoiding overconfidence, the seller will be more aware of issues that need correction in order to increase the value of the company.
- Failure to Ensure Confidentiality – When selling a business, confidentiality is very important. The seller needs to limit the information they give out to their employees while they are in preparation process. Letting employees find out the business is for sale to early can impact the working relationship and productivity, which can ultimately impact the value of the company.
- Failing to Pre-Qualify Buyers – Pre-qualifying a buyer can seem like a bad idea, but the seller really needs to take this step. By pre-qualifying potential buyers, the seller can avoid wasting time with potential buyers who lack the capital to be considered a serious buyer. While it is important to pre-qualify buyers, sellers need to be careful not to limit those qualifications to cash-only buyers. Limiting potential buyers to only those that can do all cash offers will limit potential buyers and in today’s market is pretty unrealistic. Furthermore, all-cash offers can have detrimental tax impacts on the seller, which can be avoided if the is willing to entertain different types of qualified buyers.
- Transition Issues – After the sale has concluded, there are transition issues that are often neglected. The seller and the buyer need to work how they want to the transition period to run. Sometimes this includes have the seller stay on to help train in the new owners, while other times it is a clean break. There is not one right way to transition, there just needs to be some sort of a transition plan in place.
- Having an Indispensable Seller – Many business owners are very hands-on, which is a good thing in the day to day operations of the business. However, it will be difficult to find a buyer if the seller is the whole business. Before selling, the seller should make sure there is an efficient and productive team that can manage the business without the seller in place, in order to appeal to most buyers.
- Outdated/Inferior Technology – In today’s world, it is important for the seller to ensure that any technology used for the function of the business is up-to-date and not an inferior product. Technology is so important in the current world that not having the proper technology for your business can impact the value and the sale.
- Unrealistic Price – Sellers often have an idea of what they want for the business, but this price is not always the best price. Sellers need to be realistic when setting the asking price for their business, because being unrealistic will put buyers off and could make selling the business virtually impossible. Having an unrealistic price will keep the business on the market for a longer period of time. Sellers need to be realistic on their asking price and have a valuation strategy in place with evidence to support their asking price. Being able to support their asking price will show buyers the seller is being realistic in what they are seeking.
- Inflexibility – Sellers who are inflexible with the price may never sell the business. The price is one of the most important factors buyers consider. Sellers who are completely inflexible about the price of the business will lose out on legitimate offers and may have real difficulties ever selling the business. Sellers do not have to take unreasonable offers, but they should be willing to consider a lower price if the offer is serious and supported by evidence.
Selling a business can be a great experience, but if they are not careful the seller will have a less than positive experience. Falling prey to common pitfalls is one of the main factors that can adversely affect the seller’s experience. Being aware of the pitfalls that can impact the selling process and acting in manner to avoid those pitfalls will improve the selling process.