Avoiding the major pitfalls in selling a business
Selling a business is something that most business owners will only attempt once in their career. With an estimated 70% – 90% of their total net worth tied up in their business, they can’t afford to make a costly mistake, but their success in running their own business generally doesn’t prepare them to handle one of the largest and most crucial financial transaction in their life.
This is the first in a series of articles exploring some of the common pitfalls in selling a business.
Major Pitfall No. 1
Not Allowing Sufficient Time
Many sellers put off planning for the sale of their business until close to the time they want to retire or move on to other projects. Given the complexities involved and frequent need to continue working in the business for a time after the sale to ensure a smooth transition, the time to start planning is typically 2-3 years in advance of the proposed sale in order to get the best possible price & terms for the business.
During that time, business operations can be tweaked to build up value and financial records can be put in order; not only to be accurate and up-to-date, but also to present the business in its best light. These steps will not only increase the value of the business, but will identify/remedy any potential problems that would otherwise be discovered in due diligence and potentially kill the sale or significantly reduce the purchase price & terms.
Another problem with not allowing sufficient time is that it puts the seller in a poor negotiating position. Waiting until health or other issues force the sale of a business inevitably lessens the amount of time the seller can wait for the right buyer and the right deal. Generally speaking, the less time the seller can afford to stay in the business, the more negotiating power the buyer will have over price & terms.
Major Pitfall No. 2
Not Understanding the Selling Process
Since most business owners only experience the selling process once, it is understandable that they are not familiar with the number of steps involved; nor how to deal with the issues that frequently arise at each step. Not knowing how to deal with these issues — and/or not having a trusted intermediary for advice and direction — will put the seller at a severe disadvantage in negotiations and reduces the likelihood of ending up with the best deal possible.
An experienced mergers and acquisitions (M&A) advisor can perform or contribute to a wide variety of tasks, which, when successfully executed, will maximize the seller’s return on the sale.
Such tasks include:
- Deciding when, where, how and to whom to market the business, and how best to promote its potential
- Determining what price to ask, or deciding when to go to market without an asking price
- Screening prospective buyers
- Maintaining and ensuring confidentiality throughout the process
- Developing financing alternatives for the buyer
- Working with the seller’s CPA, lawyer and financial planner to assist in structuring the deal to minimize tax liability and maximize seller proceeds
Business owners frequently realize the need for confidentiality, but have difficulty traveling the right path between not revealing anything at all and revealing too much too soon. Another common mistake is to assume that since a buyer has signed a non-disclosure agreement, it is now “safe” to reveal anything and everything the buyer may ask about. While all prospective buyers must sign a Non-Disclosure Agreement (NDA) before being provided even basic information about the business, your M&A advisor will assist in determining early on which prospects are likely to be serious prospects and which are unlikely to ever make an offer, and limit the release of confidential information accordingly.
Even with a signed NDA from the buyer in hand, the release of confidential information should be staged until it becomes clearer that the buyer is committed to making an acceptable offer.
This article was written by our member Peter McDonald, Partner at Transworld M&A Advisors.
For any queries related to this article or M&A in general, please contact Peter on 0418 354 114. All inquiries will remain confidential.