Everybody makes mistakes (everybody has those days) but there are common mistakes that many business owners make when trying to sell their business that are easily recognized and avoided.
Don't make these 5 mistakes!
By the time most business owners are ready to sell, they know people who have been through the process before and have a general idea of how much their business is worth. However, many business owners will often draw parallels between their business and others that aren’t applicable when figuring out valuation.
According to a recent report by the International Business Brokers Association, 39% of all deals fail to close because of unrealistic valuation expectations, a failure for buyers and sellers to agree on terms, offers coming in below expectations, or the seller getting cold feet, presumably because of the terms of the deal.
If you are trying to determine the value of your business before engaging with potential buyers, make sure that you’re comparing your business to similar ones in the same industry.
Even within your industry, each company has a different growth rate, level of recurring revenue, size, customer retention rate, gross margin, net margin and capital structure. Each of these factors is going to impact how much the business is worth.
Finally, your company is ultimately worth what someone is willing to pay for it. Listen closely to what potential buyers are saying about valuation. Don’t be afraid to ask why they are assigning a certain multiple to your company. They generally look at hundreds of businesses a year and, even if you don’t complete a transaction, will be able to lend insight on what multiples look like in your industry.
You probably started your business because you had a great idea or saw a market opportunity; chances are you aren’t an accountant. That’s okay! However, many business owners treat accounting as something to be managed, not as a tool that provides valuable insight into the business.
When you’re selling your company, any buyer is going to want an accurate representation of what’s happening in the business. According to that same report, 11% of all deals fell apart because of poor bookkeeping. The problem is so prevalant that almost all offers include language giving the buyer an out if the numbers don’t match the description!
First, make sure you have consistently good record keeping. Avoid off-book transactions or anything else that might appear “sketchy” to a potential buyer. If you do have to restate your financials, do so quickly and accurately and make sure you explain the unusual result to potential buyers in a matter-of-fact way.
At the end of the day, most buyers understand that your primary goal is to grow your business, not keep perfect records; they will generally expect a little bit of error in your bookkeeping. However, if the errors are bad enough that the buyer can’t get an accurate representation of the business, it will, at the very least, impact your valuation, and, in the worst case, make selling to a professional buyer all but impossible.
Selling your business is not to be taken lightly. It will probably be the biggest decision of your business career and you’ll want to take time to evaluate your options and figure out the best buyers for you.
However, it’s important to remember that buyers are busy evaluating many potential companies concurrently and won’t have time for you to consider their offers for weeks or months. If you move too slowly, good offers can expire and good partners can move on.
The first important thing is to make sure you know what you are looking for in a potential partner and not being shy in indicating when you’ve found them. Do you want to work with a specific type of acquirer? Do you want to stay with the business post-close? Do you want to sell 100% of the business or sell a minority stake? Making your preferences known and not being shy about telling potential buyers goes a long way to quickly completing a transaction.
Secondly, if there is a good offer on the table, sign it! Many business owners want a lot of time to consider, which impacts the likelihood of the transaction actually closing. If you know an offer is good, get your lawyer or banker to review it for language to make sure there aren’t any hidden terms or gimmicks (there usually aren’t), and get it signed so you can move on in the process.
Thirdly, be honest. Buyers don’t have time to play games and want to transact with a partner who is going to be upfront and open about their company. They are going to be relying on you for information transfer throughout the process and if they don’t feel like they can trust you, they’ll be a lot less willing to sign a transaction.
It’s true that selling your business is a big deal to you but remember it’s also a big deal to the potential buyer. They might have millions or tens of millions of dollars that they are investing and if you show reluctance or move too slowly, they can find other opportunities to put that money to work.
The previous mistakes are all things that business owners do that reduce the chance of a transaction going through. Negotiating terms of a transaction, despite potentially reducing the chance of closing, is an important step in getting the best deal you can. By not negotiating, you can leave a lot of value on the table.
In a transaction, everything, from the headline value to the length of the non-compete agreement, is negotiable.
Negotiate! The best time to negotiate terms is before everything is agreed on in the LOI. However, keep in mind that some buyers have specific mandates that they have to adhere to for their investors.
Feel like you need a higher headline valuation? Consider allowing a longer time frame for payments rather than an all-cash transaction. Want a shorter non-compete agreement? Try negotiating a non-compete that rolls off in various stages. Literally all parts of an LOI are negotiable so make sure you’re getting the terms you want.
Pay specific attention to the cash to be paid upfront and the structure of the cash to be paid over time. “Cash-at-close” can often be a misnomer, as many deals are structured to have a percentage of that cash in escrow for a time. A $10m "cash-at-close" figure might only end up being $9m of actual money in your bank account on the day the transaction is finalized.
Business owners often ignore everything except the headline valuation so make sure you’re paying attention to the other terms of the agreement and negotiate appropriately.
Selling your company is going to be the biggest business decision of your life so make sure you’re taking it seriously. A lot of business owners say “I’m not looking to sell but if the right offer came along, I would consider it.” This is a perfectly reasonable stance to take but, to a buyer, this means that looking at the company will often lead to a dead-end and is generally not worth their time.
Have confidence when the time is right to sell and make it known that you’re interested in seriously entertaining offers. If the time isn’t right to sell, there is no shame in saying “no” to potential suitors. Selling your business should be taken seriously and not as a side project to running it.
There’s no perfect process for selling your business but it’s good to learn from the mistakes of others who have sold before you. By doing research before you start, taking the process seriously, negotiating terms and not wasting time, you can be prepared to come to the table on equal footing and get the right deal for you.