Mistakes to avoid when Selling a Business
Selling a business is rarely easy. There are just too many variables, they are mostly outside the control of all the typical parties in a transaction; especially the seller. Plus the seller has probably done this before making it easy to make mistakes. Here’s a look at mistakes to avoid when selling a business.
The first half of 2019 has been exceptionally busy with deals closing and frustratingly, with deals almost closing but not getting to the ‘finish line.’
As a 5-time business owner and a business broker for the last 15 years, I look for patterns and reasons it is so hard to sell a business.
I think one of the key items that trips up all business owners that are selling their business is the very trait that allows them to be successful owning and operating a business and that is, they are entrepreneurs.
To decide to become a business owner or entrepreneur and be successful requires a unique set of traits. These include an ability for hard work over a long period of time, manage the risks that go with creating a business idea the market is willing to pay that makes it financially viable and having the right team around the entrepreneur for all the moving pieces of marketing, finance, operations, accounting, technology and more to operate in some sort of synchronized way.
These same set of traits that an entrepreneur needs don’t transfer when the business owner is looking to sell their business. This is because they have lived and breathed the success of their business and know it inside out whereas a potential buyer of the business has none of that knowledge, typically bring a different skill set, personality and risk profile.
Mistakes to avoid when selling a business include the following.
Do not wait too long to sell your business
Over the last 6 months or so I have been dealing with business owners that have left it too long to sell their business.
In one example, the owner started the business 33 years ago and built a beautiful kitchen and bath design and build business. The business was highly successful and generated about $4.5 million in gross revenue. He owned the real estate and successfully sold it in February 2019. Unfortunately focusing on the sale of his building and all its demands prevented him from continuing to run the business at the same level. Couple this with a slightly soft economy and the forward sales for the business at that point in time were lower than normal. Totally normal to the seller and his experience in running the business but enough to make nine potential buyers nervous.
In a second example, I am currently dealing with the owner of a business and he is in his early eighties. He has a business that he does not need to go to on a day to day basis. In fact, he has not gone to the business when it is open for over 9 months. It’s now time to sell as his health is not good but it’s difficult for him to understand and negotiate with potential buyers.
The success of a business relies on the energy and enthusiasm of the owner and its employees. The employees almost without exception respond to the leadership of the owner. If this falls away, then so does the success of the business which makes buyers nervous. Often to the point they will go and look for another business or simply not buy a business.
It takes time to sell a business. According to the California Business Brokers Association, it takes about 8 months to sell a business but only about 25% of businesses sell. The rest simply close.
Selling your business requires a team
The key to success in any sale of a business that ultimately closes is that it is a team that gets the business sold. The team obviously includes a seller and buyer. The seller’s team is best to include an accountant and attorney. The buyers team also needs an accountant and attorney. The other critical person is a qualified business intermediary or broker. Their job is to bring all these team members together plus work with a landlord, a third-party lender plus any other services to hire such as an escrow company, business or real estate appraiser, an environmental inspector and more.
Choose your team carefully as not only can a wrong team member defeat the sale of the business but inadvertently bring harm.
Be sure they know about your business, share your values, and have your best interests at heart.
Your business is not sold until the buyer agrees
There are so many steps to sell a business
Before the seller gets an offer from a buyer, some of the steps include:
- Checking all the information including legal documents about the business,
- Valuing the business,
- Preparing different confidential marketing documents about what’s for sale,
- Advertising in confidential places the business being for sale,
- Interviewing and qualifying potential buyers,
- Getting signed Confidentiality Agreements in place,
- Meeting qualified buyers to see if there is mutual interest to keep moving through the selling and buying process,
- And now – getting an offer from a qualified and motivated buyer. If the buyer is not qualified AND motivated, there is no sale of the business.
Just like any team sport, all players need to be heading in the same direction, so everyone arrives at the same finish line.
It is also critical for the business seller to make sure your business stays healthy, and your buyer will be much less likely to back out.
The importance of an accurate business valuation
Who knows the business better than the seller? Absolutely no one!
However, when it comes to valuing a business, most business owners make the following two mistakes.
- The business owner believes the value of their business is higher than what the market will be willing to pay.
- They don’t understand that the value of the business comes from its cash flow or what business brokers call the Sellers Discretionary Earnings (SDE) or for larger businesses, Earnings Before Income Tax, Depreciation and Amortization (EBITDA.) Cash flow, SDE or EBITDA are way more important than gross revenue. If you have a business with $10 million in gross revenue and operating expenses of $12 million that’s not attractive. If you have a business with $10 million in gross revenue and $2 million of operating expenses now that’s attractive.
This is the reason an accurate business valuation is critical. It is the first step in selling any business, and one that simply cannot be skipped. Hire a business broker or business valuation specialist who knows how to get you the most for your business but will also be honest in their evaluation.
An accurate business is also critical as most buyers will get finance to buy the business. Third party lenders have formula to follow to approve a loan. A quality business valuation will help with that process.
Deal fatigue is real
Once the buyer makes an offer and the seller accepts, now the hard part begins.
The first thing a buyer wants to do is check or verify all the representations made by the seller. This means looking at tax returns, analyzing financial statements, looking at bank statements and more.
If the buyer is comfortable, they will be working with their lender to get their finance in place and be complying to have the loan approved and then financed.
If you are the seller you will be tired of answering questions, tired of waiting and tired of the deal, and just want to be done. Especially if you have done this a few times with different buyers.
The obvious thing to do is to try to take shortcuts or skip things that don’t seem important. Or the big risk is to think the business is sold and to stop running the business as well as you have been because the buyer can do it their way and you are ready to exit.
Don’t do it.
If this deal falls through, you will have to start the process all over again. Hang in there and remember that patience is the most important virtue when selling a business.
Selling a business demands confidentiality
One of the golden rules of selling a business is that no one needs to know. Selling a business is totally different to selling your house. In fact, you want to keep the potential sale confidential until the sale closes escrow. This includes telling your employees and especially telling your family and friends.
A few years back the sister of a business seller was sitting in a hair salon as a customer having her hair cut. The hair stylist and the customer were talking. Sitting in the next chair was a buyer of the business. The hair stylist and the customer were talking about the customers family and how her sister was selling her business and how desperate she was to sell. The buyer of the business listened quietly and due to his conversation, offered the seller of the business less than she planned because she heard the seller was so motivated to sell.
Avoid the temptation to tell even a single employee you are thinking of selling your business. No one needs to know. It can result in employees leaving, asking for more money to stay, and generally causing trouble.
Avoid creating Customer and Vendor unrest
This also applies to customers and vendors or suppliers to the business. Most business sellers have their favorite people they like to talk to.
However, people are human and like to tell other people. Who knows where things can go and more importantly, what will be said and why.
There is a high chance that customers will leave and tell other customers and its possible vendors may put the seller on cash terms for any purchases; which only negatively impacts the business.
The key to success when selling a business
There are two keys to success when selling a business.
The first is to find not only a qualified buyer but to make sure they have the motivation to complete the transaction. Everyone wants to own and operate a business. Its much better than saying you work for a company and therefore have a job.
Being qualified not only means having the right industry skills and qualifications but also able to qualify for a loan.
The second is to keep all this simple. If you always run your business as if it is for sale and a qualified and motivated buyer comes from nowhere, now you have options. It doesn’t mean you have to sell but if the time is right and the price is right, and the seller has things to do in life that excite them; aren’t options great?
How do you avoid all these various mistakes?
The most important step is to get help but also the right help. Find a specialist that brokers businesses. A good business broker will only buy and sell businesses. They may be qualified to help broker residential properties or commercial leases or selling real estate. However, hire a qualified and motivated business broker.
Find the right business broker by having them value your business so you know what it is worth and potential lenders will lend against it.
Don’t spend your time trying to evaluate and determine the right buyer for your business. That’s the job of your business broker. If you are the seller, your job is to continue running the business and getting the maximum performance from it. If you avoid all these mistakes successfully, you will be on your way to your next adventure…very soon.
Ready to value and sell your business?
Are you thinking about selling your business?
The first place to start is to know the value of your business. If you would like more information about valuing your business, please visit my website Business valuation.
Plus, if you own and operate a business in California, here are some things to know when selling a business in California.
For more immediate help about selling or valuing your business, please send an email to Andrew Rogerson or give me a call on 916 570-2674.