Seven Common Mistakes When Selling a Business
Q: I am a business owner and I am thinking about selling my company. What are some of the most common mistakes made by those who are selling a company?
A: Preparation and strategizing, as well as attention and commitment is needed for a successful sale. When thinking of selling, be sure you don’t:
- Under or overestimate your company’s value – According to Mariner Capital Advisors, companies rarely have a current or accurate business valuation, and often an owner’s asking price is unrealistically high or low. Buyers tend to put more emphasis on current performance. Sellers value future growth. It’s important to find industry sale comparables.
Also, don’t assume buyers will be willing to pay what you consider your company to be worth. When setting a price, be as objective as possible. Often it is appropriate to not set a price.
- Misunderstand buyers’ motivation – Buyers seldom buy what sellers think they’re selling. Sellers may tend to focus on numbers when their buyers are actually looking at intangible assets, such as reputation, brand, intellectual property and management skills. Buyers also usually look for improvement opportunities. By highlighting areas that could benefit from the buyer’s greater financial or human resources, you could enhance your company’s perceived value.
- Reveal too much to the wrong buyer – When working with buyers, keep financial and operational information confidential until you’re confident the transaction will close successfully.
- Neglect to prepare financial statements – When buyers perform due diligence on acquisition targets, they expect organized and accurate financial statements. Many small and medium-sized businesses often do not follow GAAP accounting. Some businesses maintain their books on a cash basis, while others incorporate non-operating expenses and other costs to reduce their taxable income. It is essential for businesses to maintain a reliable set of financial statements that adequately reflect the business’s trends and profitability. This often necessitates bringing in a valuation professional to create pro-forma (normalized) financial statements that adjusts for mismatches between income and expenses and non-operating items. Additionally, it is important for businesses to prepare financial projections for the next three to five years to assist the buyer in understanding the growth and profitability potential of the business.
- Mention price first – A cardinal rule of negotiation is never to be the first one at the table to mention price. Value is subjective and an experienced buyer who sees your company’s potential may have a higher price in mind.
- Forget to plan for the post-sale future –Many business owners neglect to plan for their personal financial and estate needs after the sale of their company. If you’re retiring from the working world, discuss your income requirements with a wealth advisor.
- Fail to use an experienced intermediary – Owners who made ill-fated attempts to sell their own business often wish they had used an experienced intermediary. Without professional help from advisors who understand their company, industry and mergers and acquisitions market conditions, sellers are prone to take the wrong advice from the wrong people. Speak with your Mariner advisor if you would like to further the conversation.
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