At some point, you may decide you want to sell your small business. Whether you’re ready to retire, move on to a new endeavor, or you just think it’s time to let someone else take the reins, it’s important to think through the sales process carefully.
Before you start negotiating with potential buyers, prepare by reviewing these common mistakes owners make while selling their business. Learn the steps you can take to prepare for a deal and how to avoid potential problems.
Key Takeaways
- Avoid common mistakes when selling a small business by planning before you need to sell, and staying organized.
- Sell from a place of stability and preparation, not desperation.
- Partner with advisers, position your business correctly, and stay involved during the transition.
- Asking for the wrong price or selling to the wrong buyer can cost you, so choose wisely.
Not Organizing Your Records
The Balance spoke to Andy VandenBerg, a financial advisor who has sold one business, closed another, and is working on four others, including WeHero, a service that enables corporate volunteering. VandenBerg said one of the biggest mistakes you can make when selling a company is not structuring your business correctly to be sold. Based on his experience, this can look like having an “over-involved” owner, disorganized recordkeeping, or maintaining unrealistic expectations that tank the process.
What To Do Instead
Prepare for the sale by organizing your business financial records and accurately representing its current state to buyers. “Be as transparent throughout the process as possible. Buyers will ‘dig into the weeds’ and find everything out anyway,” VandenBerg said. “Potential buyers will respect your honesty and ability to be upfront about the state of the business.”
Most buyers will want to see profit and loss statements, balance sheets, and tax returns for the past three years or more before you can sell your business—as a starting point. These documents will help potential buyers understand how profitable your company is and whether they want to buy it or not.1
Selling When Revenue Is Down
Waiting too long until you have no choice but to sell your business is a common mistake. Your business plan should always include forecasted scenarios and financial projections anticipating events like this.
What To Do Instead
Instead of selling from a weak position and nose-diving profits, hold onto your business for a few quarters, build it back up, or at least let it plateau. A growing business is the most attractive kind to potential buyers, but if you can’t achieve that, be patient and present a stabilized one. Look at your trailing 12 months (or TTM) to assess your business’s current state.
Not Maintaining Confidentiality
Whether it happens through negligence or not, failing to maintain confidentiality until the timing is right can be detrimental to a business deal. Information leaks can alert competitors to your moves, confuse potential buyers, and even alarm or destabilize staff.
What To Do Instead
Make sure your broker understands how vital confidentiality is to you. You may want to ask potential buyers to sign a non-disclosure agreement (NDA) prior to negotiations.2 Avoid telling your employees about your plan to sell the business until the deal is finalized. Keep a lid on the entire process, other than with the relevant parties, until you’re ready for your business to change hands.
Mentally Checking Out
If you mentally check out early on in this process, your employees will notice, and potential buyers may also see it. Apathy and disengagement can reflect poorly on the value of your business and negatively affect profits.
What To Do Instead
Stay involved and continue to run your business as usual. Let your broker, lawyer, or CPA do their job, but remember that you are spearheading this process; they are assisting. Be sure to show goodwill to the new buyer by answering questions, being responsive, and showing up.3
Listing Too High or Too Low
Before negotiating with potential buyers, get an independent appraisal of your business’s value to know its worth. Pricing too high and ignoring market valuation can quickly drive away potential buyers. You can do a self-evaluation, but also look into getting an independent appraisal of your company’s value to help you avoid this mistake. The Appraisal Foundation has a list of resources for getting your company appraised.4
What To Do Instead
VandenBerg recommended positioning your sale to the right buyer group, whether a corporate group, a competitor, or a single member LLC. The price you can ask will depend heavily on which entity you want to buy. “Know who your ideal buyer is and position yourself correctly,” he said.
Pricing at a fair market value—the price a buyer and a seller would agree to in an open market with knowledge of all the facts—can attract multiple buyers and may encourage them to bid the price higher than you listed it.5
Consider how much money you want from the sale and how much time you are willing to spend on it. Look at what other businesses are selling for in your area and what buyers are willing to pay.
Hastily Hiring Representation
A commercial broker specializes in buying and selling small businesses. Partnering with the wrong representative could cost you money and tank your sale. Rushing to sign an agreement with a broker is never advised.
What To Do Instead
Do your research and look for someone qualified, capable, and with expertise in selling your specific kind of business. There are many ways to find a commercial broker, but one of the best ways is through referrals. Ask your friends, family members, or other business owners if they have any recommendations for you.
The Bottom Line
When you sell your business, you’re selling the idea of it. You’re selling an investment you know inside and out, and if you can maintain a level of expertise, it will help make an enticing sales pitch for your business. A successful sale will allow you to move on to new ventures in a place of financial advantage.
Frequently Asked Questions (FAQs)
How do you value a small business?
There are three common approaches you can use to assess business value:
- The income approach involves looking at projected revenue while accounting for potential risks.
- The market approach involves comparing your business to competitor businesses that have recently sold.
- The assets approach requires you to subtract your total business liabilities from the total value of all your assets.6
Business valuation also involves looking at the number of your employees, your location, the industry you operate in, and the size and condition of the property that houses the business.
When is the best time to sell my business?
Experts recommend starting this process at least two years before you want to close a deal. Allan Taylor Brokers recommends selling when your industry is growing, “sales are up year-over-year, gross margins are healthy, and profitability metrics” look good for small businesses in your industry. Don’t wait until you are already facing burnout or bankruptcy. SOURCE: The Balance. Article by Hannah Hottenstein. This article was originally published by the balance
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