This kind of “common mistakes” list is popular on business broker Web sites, and I reviewed a few in preparation for this article. But many seem a little self-serving, so here is my list, fresh and not re-hashed.
1.The number one mistake that I see is not using a business intermediary. Oh wait, that is a little self serving coming from a business broker, isn’t it? Let’s start over.
The biggest mistake I see is not preparing the business financially. I just witnessed this again yesterday for the umpteenth time. This business has been dipping from Uncle Sam and now wishes to make adjustments in two dozen expense categories, and they admitted there is more that will remain unseen. A business is often only worth what the business can get financing for, and (especially with the tightening of credit) you can’t expect the lender (and the SBA, a government entity) to agree with all tax advoidance activity. It is hard enough to convince a buyer. It is much, much better to start preparations two years before you sell. Produce good clean books, pay a few more taxes, and sell your business for far more.
- Not preparing your business in other ways. The larger the business, the more thought needs to go into succession planning. Or at least some thought. While a sub shop may allow a buyer to step into full control within days of close, I have handled businesses that take years. I heard the manager of a private equity group say, “I always ask myself, if the owner walks, does the business walk?” Ask yourself the same question, and then try to make and execute a plan that would make a new buyer comfortable. Similar to the financial planning, this planning can take a couple of years. Oh, and physically clean up the business too. Like a house, it helps if it shows well.
- Delaying the deal. Delays kill deals. Always remember when in a transaction to keep it moving. Provide documents, fix equipment, answer questions, etc. Always keep it moving – smaller steps if necessary.
- Having too high a valuation. Many businesses that are for sale at any given time will never sell because they are just listed for too much. Many sellers use a number that is what they need or want, and not what the business is worth. Just about every seller has a reason why their business is worth more than the statistically analysis would indicate. I admit that I’ve been convinced on a number of occasions by the seller to ask for a higher price for a number of reasons, and I’ve yet to see that work. I did see a “Common Mistakes” list from a broker that said that under-valuing their business was a common mistake. I have seen that a few times but I wouldn’t exactly say it is common. (Although I do love it when that happens because I get to be a prince instead of the bad guy.)
- Not reaching the right buyers, or trying to sell to just one buyer. Many small businesses are advertised on the web, and only the web. It’s a great resource. But medium businesses on up and some unique small businesses need to be marketed in different ways. Professional investors called private equity groups are in constant search of quality companies. Synergistic companies may wish to acquire for strategic reasons. If you think you have a company that could use some custom marketing, ask for a marketing plan from your broker. If you get a blank look, you may want to go somewhere else.
- Demanding all cash or being inflexible in terms. The all cash deal is almost completely gone. The SBA is publishing new guidelines that will require a seller to carry at least some paper, and the same is true for larger deals. In addition, with buyer uneasiness because of the current economy, earnout arrangements (future performance based payouts) are more common. An inflexible seller will have a very tough time selling their business. I wish it wasn’t so. In fact, my wife has owned a business for many years and has told me she wants all cash when she sells someday. Sigh. So I’ll have the same issue in my own family to deal with.
- Not using professionals appropriately. I do recommend using a broker, and the right one. Industry certification really does mean something, so look for the IBBA (www.ibba.org) CBI or MM&A certifications. Get tax advice early, and realize it is possible your CPA isn’t the best person since they don’t see a lot of M&A work. Often your broker will be able to direct you in this area (for example, we are pretty competent in tax issues). If you are stuck in this area or unsure, go to www.waa-online.com. Monty Walker is a true expert on business sale tax advice, and he can help. Pay for an attorney to at least review the agreements, but remember what their role is. In my opinion, you should not give up control of the transaction to attorneys.