Common Mistakes People Make When Selling a Business
Maybe you have been running your business a long time, and you are looking at retirement. Or perhaps you have been working the same business for a long time and feel like it is time to move on to a new venture. Whatever your reason, you feel like now is the time to sell.
However, when it comes to business and investment, timing is everything. Unfortunately, people typically make mistakes in this area. When selling a business there are many factors to consider, and more often than not if the seller is not cognizant of these mistakes and does not work to avoid them, selling a business can have a negative effect on their financial future.
Here are a few of the most common mistakes people make when selling a business and how to avoid them.
Selling a Business without Determining Transition Cash Flow
That is a bunch of fancy language that essentially means that if you sell before you actually look at your cash flow before you sell and what your cash flow will be after you sell, you might be making a mistake. Whether you plan to retire or to reinvest the funds you realize from the sale of your business, it is important to not just focus on the amount of the sale, but how that amount will affect both your wealth and your personal cash flow.
- Consider where your cash flow comes from and how you use it.
- Calculate income tax liability.
- Look at your risk and liquidity profile. Determine how the sale of your business impacts both.
Looking honestly at these factors will help you determine the timing of your sale, and whether you should hang on to your business or sell now. Review your retirement planning, and the income you will need to maintain your lifestyle, and determine if the sale assists that plan or hampers it.
Expecting Cash from Selling a Business
Of course, a cash deal would be the ideal situation, but that is typically not the case. While the business owner will get some cash at closing, typically there are other parts of the deal involved.
- Seller Financing: The seller often finances at least part of the deal.
- Earn-outs: Money received on the contingency of the future performance of the business
- Escrow/Holdback Agreements: Agreements that say a seller will finish future work before receiving this final payment.
The point is that the seller may be waiting for a large portion of the money from a sale, and will not see it right away. This is a factor to consider when retiring or moving on to another business endeavor. The full price you get from the business sale will not be in your hands immediately.
The One-Buyer Error of Selling a Business
While it may be simpler to evaluate one offer at a time and may give the impression that the seller does not need a business broker or similar professional to help them sell their business, this is seldom the case for a number of reasons.
- The buyer seldom offers the best price and terms they could afford, or the market would offer because they don’t face any competition from other buyers.
- Legal documents must still be drawn up and filed depending on the type of sale and the niche of the business, and a professional is the best way to make sure those steps are completed fairly on both sides.
- There are several ways to sell a business that can be explored, including a management buyout, employee buyout, financial buyers, strategic buyers, and even an initial public offering (IPO). All of them should be considered.
Entertaining several buyers and a variety of offers creates more options and purchasing outcomes and ensures that you get the right fit for both you and the company. Keep your options open for the best outcome.
Not Being Prepared
When you find a buyer, they will perform due diligence on your company. None of this should come as a surprise to you, because you should have already done it yourself. Is your business ready to sell? Is it attractive to buyers? What is your financial position currently? What is the outlook for both your business and your industry?
These are things you should be looking at regularly anyway, but when selling your business, a thorough look at all of these things can result in increased profitability before the sale. No matter who the buyer ends up being or what the method of sale, this is a positive outcome.
Remember that you also need to work with your accountant. They have probably set up your books for minimum tax liability, and balance sheets and profit and loss statements should be recast to show the buyer the true income and the earning potential of your business.
Selling a business is tricky, and you need the help of a professional business broker to help you navigate those intricacies and to help you avoid many of the most common mistakes people make when selling a business. Have questions? Ready to sell? Contact us here at Rogerson Business Services, and we will help guide you to the best outcome when selling your business.
