3 Mistakes to Avoid When Selling Your Business
Want to get the right price for your company? Plan ahead, find the right buyer and take yourself out of the picture
Many entrepreneurs in their 50s and 60s who spent years building successful businesses would now like to sell them so they can retire, but they're finding it to be more difficult than expected.
What's more, it could be harder for sellers to get what they hoped for in the foreseeable future.
The reason? A downward pressure on demand that's still lingering from the recession, coupled with a spike in the supply of businesses on the market.
Cornell University economist Robert Avery estimates that 70 percent of the 12 million privately owned businesses in the United States will change hands as boomers retire in the coming years.
As a consultant with ExitPlan.Me, an advisory firm specializing in small business sales, I’ve noticed that retiring owners make three big mistakes that keep them from getting as much money from buyers as they could.
Here are those errors and how to avoid them, so you'll receive the most for your business when you sell:
Mistake No. 1: Not Planning Ahead
Many small business owners begin thinking about selling only a few months before they’re ready to retire. Instead, you should prepare well ahead of the nine to 12 months it typically takes to sell a business. That way, you’ll help ensure the business is ready to sell when you are.
Start by defining your personal retirement goals. As you develop your plan, work backward from the date you want to sell, building in conservative, realistic timeframes for milestones between now and the ultimate transaction with a buyer.
Determining the true market value of your business is essential. Many owners put price tags on their companies based on their gut feelings or a general sense of what they’re worth, rather than the facts.
A proper valuation, however, is based on the business’ current and potential financial and operational characteristics, the number of similar firms for sale locally, the economy at large and an understanding of what the market will bear.
There isn’t a Zillow-like tool that will tell you exactly what your business is worth. But there are two ways to estimate its value.
Another is to pay for a more accurate professional business valuation from a local accounting firm or a professional valuation expert. That’s especially worth considering if you think your business will sell for more than $1 million.
After you have a realistic price in mind, it’s time to begin getting organized.
Business buyers and their advisers generally require lots of documentation. Prospective purchasers typically want at least three years' worth of accountant-reviewed income statements, balance sheets and cash flow statements.
You’ll also want to gather up your incorporation papers, permits, licensing agreements, leases and customer and vendor contracts.
Finally, don’t forget to build a team to help you exit the business. You’ll definitely want a tax adviser familiar with business sales as well as an attorney. But it could also be useful to hire a financial adviser, business intermediary and marketing support.
Mistake No. 2: Selling You, Not Your Business
Over the years, you have built up a wealth of information inside your head about the vast nuances of running your business, from, say, the best day of the week to contact suppliers to the employee who trains your new sales associates the fastest.
But the problem when it’s time to sell is that the performance of your business may be too contingent on you.
Don’t forget that prospective buyers are looking to buy your business, not you. So, the more you can transfer to the buyer your knowledge of what’s needed to run the business, the more you’ll get for your company.
Most purchasers are looking for a sustainable future stream of income. To convince them of this probability, you need to provide prospects with documented processes and systems explaining how your business would work when you are not there.
Be sure you can clearly articulate the benefits of owning your business: things like recurring revenue streams, a diverse customer base and the ability to serve a niche better than your competitors.
Mistake No. 3: Selling to the Wrong Buyer
Not all buyers are created equal. A good question to ask yourself is: “Why does this buyer want to acquire my business?” Once you’ve figured out the answer, you can better determine if this is the type of buyer you want.
The key is understanding which type of small business buyer you’ll be working with: liquidators, operators, financial buyers or strategic buyers.
Liquidators are interested only in your company’s hard assets. They’re looking for opportunities to buy assets cheap and sell them at a profit.
In some cases, your balance sheet can make this type of deal worthwhile to a liquidator. But in most cases, liquidations are done only after a business declares bankruptcy.
Operators want to buy a business and run it. In this scenario, the deal is normally seller-financed because operators tend to have less money than other buyers.
Financial buyers and strategic buyers are interested in the company's potential. They’ll scrutinize your financials and usually come up with an offer based on how they can use your company to achieve strategic objectives.
In many cases, these buyers aim to control more of their vertical supply chain or the availability and price of certain products. Sometimes, they want to gain access to your market.
In any case, if you’ll be selling to a financial or strategic buyer, you want to suss out their weaknesses and how your company’s strengths will help overcome them.
The sale of your business will be one of the largest financial transactions in your life. Give it enough time and attention to get the right price and you’ll increase your chances of having the retirement you imagine.