Mistakes to avoid when Selling your Business
With Phuket Business Broker
1. Thinking you’re ready to sell when you’re not.
For most business owners, selling a company is a once-in-a-lifetime event. Consider how emotionally invested you are in your company, and how your life will change when you let it go. Will you be equally happy and fulfilled doing something else?
You’ll also want to ask some hard questions about your financial expectations. Do you have an idea of your company’s true value? What are your personal financial goals? Will a transaction help you achieve those goals, or could it set you back?
2. Thinking your business is ready to sell when it’s not, It’s all in the Preparation.
Before buyers sign on the dotted line, they will research your business as they would any other big purchase. Sellers need to be prepared to demonstrate that the worth of their business matches the asking price. This means keeping your financial records in order. Keep a minimum of three years’ worth of documents (ideally a longer history), including tax returns and expense records. Good record keeping is a simple way to establish buyer trust.
Be sure to resolve any outstanding issues that could derail a sale, like legal issues or unfilled key management positions. If your business is struggling, focus your efforts on restoring it to profitability and constructing a plan for continued success. A detailed strategy can give you a much higher chance of attracting the right buyer and making a sale happen.
Just as important as the paperwork, don’t forget the physical elements of your business as well. Consider upgrading technology, establishing and documenting key processes and even sprucing up your interior – the physical appearance of your business is often the first impression the buyer gets, so make sure it’s a positive one.
Knowing your numbers.
Important in the sale process is the financial accounts, as these play a large part in the valuation of the business. Thus it is important that your financial accounts are current, and that you can speak with confidence around the margins, revenue and expense lines.
Emotionally and financially, you might be raring to go. But is your business?
3. Know Your Worth.
A business is ultimately worth what a willing buyer will pay for it. However, before you start the sale process, research should be done on sales prices for comparable businesses. While no business is exactly like yours, there are sources. Through the Internet, one can find what public acquires are paying for businesses in your industry. Experienced accountants or business brokers may also have a sense of common formulas, whether it is one times sales or 2 times net profit. (earnings before interest and taxes) or based on the value of the assets.
4. Pricing Problems.
Inexperienced sellers have a tendency to set a price (usually on the high side) before they’ve determined value. The reason this is such a major mistake is that price is the single most important factor in determining how long a business stays on the market. Sellers who have taken the time to conduct a thoughtful valuation process before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to reap the benefit of a faster, smoother sale.
Pitching the Price.
Knowing what you end game looks like helps with any planning, so selling a business is no different. Understanding what the potential sales value is of your business can not only sway the strategy taken to sell it, but it can also clear the mind for what is a good offer. Take the time and get the business valued before you go to the market looking for offers.
Mistake 5. Operating your business as if you’re selling, before you sell it.
As long as you own your business, running it should be your top priority. The selling process is important, but that shouldn’t take away from daily operations and established corporate objectives. If you decide to skip out on a great contract or choose not to invest in necessary equipment because you think you smell a transaction, that’s risky. You never know what will happen on your end, or on a potential buyer’s end. For many reasons, the most promising deals can stall or completely fall through. So keep your eye on the ball – and let your Business Broker help you take care of the rest.
Risk of the Selling Process. One of the biggest risks in selling a business is the risk that the business will deteriorate while the management is focused on the selling process. The owner will not have time to manage his business as he did in the past. The selling process is very time-consuming, with management focused on negotiating with the buyers and dealing with the attorneys, accountants and other professionals who may be involved in the process. Investigate any potential buyer; speak with other individuals who have sold to this buyer. What is the buyer’s reputation for keeping his word?
6: Working with an Inexperienced Business Broker
Unless a broker has previous experience selling a significant amount of local businesses, it is unlikely that he or she will be equipped to effectively guide you through a sale. Brokers without experience in the hospitality industry may lack the connections to successfully market your business. A truly qualified broker can also help with one of the critical steps in listing your business for sale – getting a proper business valuation. Most owners have an inflated sense of value in their business, but an experienced broker can provide the objectivity needed to start the pricing conversation.
With more businesses coming on the market this year, it’s important to get the word out and market the sale broadly to attract the greatest number of potential buyers. Listing online or through a business broker on the open market can help in this endeavor, allowing more potential buyers to see your listing and generating greater demand from potential buyers. The more buyers that know about your business, the more offers you are likely to get. Business brokers versed in your industry understand that higher demand for your business translates to a higher sales price, so the goal is to create a multiple-buyer situation. Don’t limit your focus to just one or two potential buyers or the first buyer to make an offer. Instead talk to multiple qualified prospects at the same time to continue generating a sense of urgency and demand for your business. Also, speaking with multiple buyers can help generate a backup plan in the event that the primary buyer is forced to withdraw from the sale.
7. It’s not DIY.
With the value of one of your most important assets in the balance, if you are not an expert at selling businesses – then find someone who is. They will cost you some money, but if the expertise of the professionals can leverage a 20% increase but perhaps cost you 10%, then to me that’s value. Seek out the right people, check their credentials, agree on a fee structure and then….listen to the advice that they give…..after all, that is what you are paying for.
8. Not Understanding the Market
Selling at the right time and for the right price is much easier said than done. It is important to work with your broker to grasp the current state of the market and what that means for the sale of your business. It is important to price it appropriately. The goal is to set a price that will attract a number of serious buyers and yet allow you to close the deal at the highest possible sales price. To properly price your business, you will need to know where it stands in the market as compared to others. So, work with your broker and conduct some research to determine where your business stands in the current marketplace, and then price accordingly. Business owners who plan ahead and take the time to research the market will stand out from competition, thus resulting in more offers and a heftier sale price in the end.
There is a fine line between being eager to favorably answer every question from a prospective buyer…and misrepresenting the facts. Areas to be careful of are around the financial data (trading numbers, forecasts etc) and value items such as client data bases, certifications, and contracts. It is advisable to have any memorandums or financial data checked by your lawyer/accountant before distribution to potential buyers.
As a seller, you want to portray your business in the best possible light. However, there is a big difference between representing your business in the best light and misrepresenting your business to prospective buyers. At some point during the selling process you will be tempted to exaggerate numbers, distort projections or even cover up problems. However, misrepresentations send up red flags when prospects review the actual financials and can become the basis for legal action after the sale. Talk to your attorney or broker about everything, including business forecasts, before passing the information on to the buyer.
Mistake 10. Failure to Pre-Qualify Buyers. Not all buyers are real.
Only a real buyer will consummate a sale and pay the money, but pretend or wannabe buyers can cost you a lot of time and energy. The balancing act is when to qualify a buyer – do this too soon and risk scaring them off, wait too long and you risk wasting a lot of time or divulging critical information. Confidentiality agreements are the first step in qualifying a buyer, with this allowing more detailed information to be provided – but I would hold back critical info until financial ability is shown. You need to establish clearly that the potential buyer has the financial means to close a deal.
Early pre-qualification of prospective buyers is essential for a successful business sale. In fact, more often than not pre-qualification draws prospects deeper into the sale. More importantly, early pre-qualification protects sensitive information about your company from falling into the wrong hands and ensures that only serious buyers have access to key details of the sale. Pre-qualification documents like confidentiality agreements and financial background information are standard requirements for prospective buyers interested in seeing critical information about your business.
11. No Plan for ownership transition.
The preferred option for the majority of business owners, is to sell their business, collect their money and exit stage left. The reality is however that many sale agreements will require the old owner to stay for a period of time to ensure the full transfer of value/knowledge. So make sure that this is appropriately negotiated and considered (by you) as part of the sale agreement – inclusive of pay values, duties and duration.
Many owners are so focused on selling their business that they completely neglect the transition process that will occur after closing. Some buyers will insist on the seller remaining on for a few months to assist with the transition or training, while others prefer a clean break. Either way is fine–as long as the buyer and seller have discussed the transition and reached a mutually acceptable arrangement during negotiations.
12. No responsibility……
You built your business with close involvement; I recommend that you sell it in the same way. Firstly, you know the business better than anyone else, so you’re an excellent reference source. Secondly, any repercussions from accidental misrepresentation will come back on you, and lastly, this is an important asset in financial terms, so you need to monitor its sale and agree with any transition arrangements.
13. Breaching Confidentiality.
Confidentiality is important. If the word gets out that your business is on the market, it could adversely affect sales and your relationship with your staff. A good broker will know how to market your business whilst maintaining strict confidentiality. If you are selling on a DIY basis, this can be tougher, but still possible by pitching the sale of the business directly to a group of targeted potential buyers.
In addition, it is hard to keep sales efforts confidential. Employees who learn of a possible sale may become worried about job security following a change in ownership and may start looking for and finding other employment. To the extent that the value of the business is dependent on key employees and the buyer becomes aware of employee defections, the purchase price may deteriorate in the negotiating process. Thus you may wish to advise employees that if they remain until a closing, they will be entitled to a bonus.
14. Unwillingness to Leverage Professionals
You’re an expert at running your business–not selling it. Yet it’s always surprising how many sellers are averse to hiring a business broker to facilitate the sale of their business. Would it be nice to save the roughly 10 percent brokerage fee? Sure, but in most cases brokers are capable of adding at least that same value to the sales price. Even though there are certain circumstances in which a for-sale -by-owner approach makes sense, most owners are better off hiring a broker to handle important tasks like preparation, showing the business to potential buyers, marketing and negotiation. Likewise, don’t hesitate to leverage the expertise of other professionals (e.g. accountants, lawyers, financial consultants) when you need them.
15. Taking a Hands-Off Approach
Once you’ve hired a broker, your work is done, right? Not a chance. Unfortunately, many sellers make the mistake of disengaging from the selling process once they’ve signed a brokerage agreement. Although your broker will work hard to market your business, no one has more motivation to sell, or inside knowledge about the business, than you do. If you haven’t done so already, have a conversation with your broker about how you can proactively market your business without stepping on his toes. In addition, once the broker has found a few qualified buyers, you’ll play a key role in instilling confidence in the buyer that the business can be purchased and managed successfully. Whether you like it or not, your interaction with the potential buyer will have a large impact on whether your business sells.
16. Consider the sale terms.
Increasingly business sales involve more than just “cash sale” terms, often instead involving a lump sum and then a deferred payment scheme. This can be driven by tax objectives or financing requirements, but as a seller, you must remain open to at least considering these different aspects, as this increases the potential market who can buy your business.
There’s nothing wrong with being confident that you are going to successfully sell your business at a good price–unless your confidence causes you to neglect activities that are necessary to make your sale a reality. Far too many sellers go into the selling process with the confidence that they will get top dollar for their business simply because they believe that is what it’s worth. In the real world, valuation is based on quantifiable criteria, not the owner’s personal estimation of worth. To avoid this mistake, get an objective third-party valuation, or visit online business-for-sale websites to see comparable businesses for sale, early in the process. Once you’ve identified an appropriate valuation for your business, address the issues that could lead to increases in value.
Inexperienced sellers have a tendency to set a price (usually on the high side) before they’ve determined value. The reason this is such a big mistake is that price is the single most important factor in determining how long a business stays on the market. Sellers who have taken the time to conduct a thoughtful valuation process before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to reap the benefit of a faster, smoother sale.
The BIG MISTAKE: Insufficient Preparation
Lack of preparation is by far the most common mistake that small-business owners make. Just like you would spruce up your house before hanging a “For Sale” sign in the front yard, it’s important to address several key aspects of your business before listing it in the business-for-sale marketplace. Financial documentation, sustainable profitability, lease issues, staffing problems and other concerns will not only impact salability, but also the price your business will command in the marketplace. Another thing to consider is that the time to start preparing for your business sale is right now–most brokers recommend owners start the preparation process at least two years before the business is listed.
Selling a business is a complicated and time consuming process. We at Phuket Business Brokers are here to help you through all the steps. Contact us today for a free evaluation of your business.