Successful entrepreneurs spend much of their lives building valuable companies, and ultimately, many of them end up selling those businesses. It is very common for the business to be the most valuable asset a business owner has. When selling the business, it is likely that the company will attract a higher valuation if the business owner has made the business ready for sale and is also prepared for the sales process. However, if business owners make big mistakes when selling, or their business is not ready for sale, they risk not receiving the amount of money for their business that they probably deserve, given their efforts over years and decades. If you are a business owner, we know which outcome you probably prefer, and with that in mind, here are four types of mistakes that can lower the value of your business or possibly derail a sale— along with advice on how to avoid them.1
Mistake #1: Failing to financially prepare the company for sale
Making sure your company and its’ financials are as appealing to an acquirer as possible can translate into a higher sales price. It is very similar to when you are selling your home, making sure it is well maintained and then fixing little things that need attention right before you put your house on the market. A well-maintained business with accurate and transparent financials is simply more attractive to potential buyers. Unfortunately, many entrepreneurs do not do as good a job as they could when it comes to preparing financially.
Some things that you can do in this area include:
- Improving the balance sheet- Effectively manage cash, accounts receivable and payables, along with cleaning up inventory and writing down or disposing of nonperforming assets.
- Addressing the cost of funds- Maximize working capital arrangements and make sure loan covenants are as favorable as possible to the business
- Having audited financial statements- Gives credibility to the financials which may give the buyer more confidence in the business. This could lead the buyer to be willing to offer a better price, or more favorable terms such as a shorter due diligence period or more cash at closing .
Mistake #2: Failing to identify and address key personnel
Key personnel are often the drivers of a successful business and are therefore critical to the new potential owners and the price that they are willing to pay for the business. Key personnel need to be addressed in two areas. First, they need to be incentivized to stay with the business and its new owners if that is important to them, and second, the business needs to be protected in the event a key person were to depart the company.
There are many ways to incentivize key personnel to stay with the business and help facilitate the transition of ownership. Employment contracts with retention bonuses are commonly used. In order to protect the business, it is important to have non-compete and non-solicitation agreements in place with key personnel before the business is offered for sale.
Mistake #3: Failing to eliminate likely deal killers
There are a number of possible commonly seen deal killers that can potentially reduce the price that is offered or even derail the sale of the business that do not fit neatly into any category. Some of these are:
- If the company has unresolved tax problems or controversies
- The owner is paying family members or other employees for services at a much higher rate than the owner would pay a capable third party for the same work.
- The existence of unresolved litigation
- If the company has material violations of federal, state, or local environmental laws and regulations, the cost to fix them is often hard to quantify or predict.
Mistake #4: Failing to work effectively with a team of qualified advisors
It is very important to do the things that enhance the company’s value while also avoiding mistakes that can diminish the company’s value in the eyes of buyers, making it harder to sell. Sometimes business owners try to minimize professional fees when going through the sales process (or worse, try to “go it alone”). Support from a team of superior professionals that are experts in their respective fields, while working collaboratively with each other and the business owner can increase the chances of getting the highest possible price and the best terms for a business sale. This type of team can recommend value enhancing strategies and also spot mistakes before they occur and help correct them. Often this team will include a corporate attorney, an M&A advisor or investment banker, and a specialized accountant. Be sure to understand and negotiate terms and fees regarding their services surrounding the sale of your business (for example, investment banking fees).
What next? If you are considering selling your business soon, or even a few years from now, it likely makes sense to put together a team of professionals to help you prepare and navigate the journey. Earlier is usually better. By getting your team in place in advance of the sales process, your results could be a smoother transaction and a higher value received for your business. We can assist you with this through our BizOwnFIT™ process where we work with you to balance the demands of your business and personal financial life so that you can achieve financial independence. We provide the expert guidance you need to take you from where you are to where you want to be and make well-considered financial decisions along the way. You can learn more about our BizOwnFIT™ process here.
1Based on an exploratory survey of 107 corporate attorneys, a number of possible mistakes were assessed. Using a statistical methodology, four categories of mistakes were identified. Source: AES Nation, 2018.