Selling a small business can be a daunting task. Whether you’re ready to retire, move on to a new endeavor, or just think it’s time to let someone else take the reins, it’s important to think through the sales process carefully. To ensure a smooth and successful sale, it’s crucial to avoid common mistakes that many business owners make. In this article, we’ll discuss the most common mistakes to avoid when selling your small business and provide tips on how to prepare for a deal and avoid potential problems.
Not Organizing Your Records
One of the biggest mistakes you can make when selling a company is not structuring your business correctly to be sold. This can look like having an “over-involved” owner, disorganized recordkeeping, or maintaining unrealistic expectations that tank the process. To avoid this mistake, prepare for the sale by organizing your business financial records and accurately representing its current state to buyers. 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. These documents will help potential buyers understand how profitable your company is and whether they want to buy it or not.
“Be as transparent throughout the process as possible. Buyers will ‘dig into the weeds’ and find everything out anyway,” said 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. “Potential buyers will respect your honesty and ability to be upfront about the state of the business.”
Selling When Revenue Is Down
Another common mistake is waiting too long until you have no choice but to sell your business. Your business plan should always include forecasted scenarios and financial projections anticipating events like this. 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
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. To avoid this mistake, 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. 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. To avoid this mistake, 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.
Listing Too High or Too Low
Pricing your business too high or too low can also be a costly mistake. 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. Pricing too low can lead to leaving money on the table. Position yourself correctly by knowing who your ideal buyer is and pricing at a fair market value.
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. The Appraisal Foundation has a list of resources for getting your company appraised.
Hastily Hiring Representation
Partnering with the wrong representative could cost you money and tank your sale. Rushing to sign an agreement with a broker is never advised. 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.
Not Planning Ahead
One of the biggest mistakes you can make is not planning ahead for the sale of your business. The process of selling a business can take months or even years, so it’s important to start planning as early as possible. Create a plan that outlines your goals for the sale, the timeline for the process, and the steps you need to take to prepare your business for sale.
Not Understanding Your Market
Another common mistake is not understanding your market. Before you start the sales process, it’s important to research your industry, your competition, and your potential buyers. Understanding market trends, customer preferences, and industry regulations can help you position your business correctly and identify potential buyers who may be interested in your business.
Not Building a Strong Team
Having a strong team in place can make the sales process smoother and more successful. Consider hiring a lawyer, accountant, or business broker to help you with the legal, financial, and logistical aspects of the sale. These professionals can provide valuable advice and guidance throughout the process, helping you avoid common mistakes and maximize the value of your business.
Failing to Communicate Clearly
Clear communication is essential throughout the sales process. Make sure you communicate clearly with potential buyers, brokers, and other professionals involved in the sale. Be honest about the state of your business, your goals for the sale, and any concerns you may have. Clear communication can help you build trust with potential buyers and ensure a smooth and successful sale.
In conclusion, selling a small business can be a complex and challenging process. To avoid common mistakes and ensure a successful sale, it’s important to plan ahead, organize your records, maintain confidentiality, stay involved, understand your market, build a strong team, communicate clearly, and price your business correctly. By following these tips, you can increase your chances of selling your business at a fair price and moving on to new ventures in a place of financial advantage.
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