Critical Mistakes to Avoid When It Comes Time to Sell a Business

Mike Ginsberg

By definition, business owners wear a lot of hats. Throughout their professional careers, owners are head cheerleaders, chief bottle-washers, disciplinarians, mentors, negotiators, even therapists. However, most business owners never sell a business until it comes time for them to sell their own, so very few can add the title of “business broker” to their collection of titles.

Critical mistakes are sometimes made during the selling process that could cost owners many millions of dollars in transaction value. Some missteps could even prevent a sale from closing altogether. Fortunately, when made aware of these pitfalls in advance, sellers can avoid most of these mistakes. With that in mind, here are my top five costly mistakes that owners should avoid making when selling their business, and some proven techniques to prevent them from happening.

Not Preparing the Company for Sale

Responding to an unsolicited offering before properly preparing the company for a sale is by far the most common mistake that business owners make. It is also the most preventable mistake that occurs. Ben Franklin said it best when he stated, “By failing to prepare, you are preparing to fail.” Don’t prepare to fail when it comes time to sell a business.

Preparation starts with making sure the financial house is in order. Owners contemplating a sale should maintain a complete set of financial statements, including a historical balance sheet, income statement, cash flow statement, and an adjusted income statement that depicts the company’s normalized operating income, going back at least 3 full years. Owners should also maintain this information through the most recent month along with a budget to actual statement for the operating year. Establishing a forecast with defensible assumptions is preferred by most buyers.

In addition to financial preparation, owners should allow enough time to address the following potential problem areas that may exist within their operation:

1. Long-term lease obligations
2. Staffing gaps and any lingering personnel problems
3. Potential and existing lawsuits
4. Client matters
5. Capital expenditures and infrastructure inefficiencies

Not Leveraging Professionals

Owners are experts at running their businesses, not selling them. One of the biggest mistakes that business sellers make is trying to do everything by themselves. Very few owners have the experience, or time, to handle all aspects of selling a company by themselves. Putting together a talented team of experienced advisers should be done before a sale is being contemplated, starting with engaging an M&A professional (a.k.a. intermediary or broker). Many owners try to avoid engaging a broker to save the brokerage fee. This has proven to be a critical mistake in numerous transactions and most owners are simply better off engaging an experienced transaction advisor from the onset.

Leveraging the expertise of other professionals is also critical and should not be overlooked, including:

1. An experienced transaction attorney
2. A skilled accountant to help present historical, current and projected financial information and evaluate the tax impact of proposed deal structures
3. An experienced valuation firm to establish pricing expectations (industry expertise is a plus)
4. A financial advisor to determine the impact of the transaction on your estate

Jeopardizing Confidentiality

If an owner doesn’t maintain confidentiality when selling their business, irreversible harm can be inflicted upon the business that may negatively affect the price and/or terms of the deal. Worse, the buyer may walk away from the transaction altogether. Clients, executives, managers, employees, competitors and vendors are impacted differently and should be addressed at different stages of the transaction. For example, some buyers may want to start negotiating certain vendor engagements prior to a closing to determine the financial impact on their calculations. By maintaining proper control of disseminating information, an owner could prevent unnecessary breaches in confidentiality.

Having Unrealistic Pricing Expectations

Simply stated, some owners have unrealistic price expectations. If they undervalue their businesses, they will most likely leave money on the table. If they value their business too aggressively, they run the risk of scaring off qualified buyers or not selling at all. Before entering into discussions with a prospective buyer, it is critical for owners to gain knowledge of how transactions in their particular market are being priced and structured. This could be accomplished by confidentially reaching out to other owners who recently sold their business or engaging an expert with extensive valuation and transaction experience to conduct an appraisal of the selling business.

Failure to Pre-Qualify Buyers

Accurately pre-qualifying prospective buyers is essential for a successful business sale. Before releasing any confidential information, a seller needs to be certain the buyer has an interest in their particular type of business and they have the financial ability to complete a transaction. If outside financing is needed, a seller should try to determine the buyer’s requirements in advance of disclosure. Accurate pre-qualification ensures that only serious buyer candidates gain access to the proprietary details of the selling business, such as key client information and personnel information. One additional caution, a buyer’s qualifications change over time and should be made current early in the sale process.

Building a successful business takes time and effort. So should a sale. Selling a business is a challenging and unnerving undertaking, even under ideal circumstances. It becomes even more challenging when preparation is lacking. Remember, when it comes time sell a business, there are a host of essential tasks that need to be performed to avoid making critical mistakes.