Most businesses are sold at less than their full value. Why does this happen so often? Below are the 9 most common mistakes business owners make in selling their companies.
I’ve also included some action items that you can employ to help minimize or eliminate these problems entirely:
- Unreliable financials. Nothing lowers your valuation more quickly than incomplete or inconsistent financial records. CPA-prepared financial statements will attract more buyers and shorten the amount of time needed for due diligence, meaning you can sell faster.
Action item: Hire a CPA firm to prepare Audited Financial Statements.
- Expectations beyond fair market value. You’ve poured your heart and soul into your business, and now want to capitalize on all that hard work. Unfortunately, when determining your business’s value, your friends’ opinions or public market multiples can lead to unrealistic expectations. An independent estimate of your company’s worth is necessary to sell at the right price.
Action item: Contact an investment banker to give you an “opinion of value”.
- Allow emotions to drive decisions. Many business owners put their companies on the market in hopes of fetching an extraordinary price for their company. The truth is that these windfalls are rare. Instead, buyers need to keep their expectations realistic, because offering your company at a price far above fair market value exposes your business to significant risk and disruption. In addition, you risk tarnishing your reputation as a seller. When you really do need to sell the company a few years from now, the market won’t take you seriously.
Action item: Only put your company on the market if you’re truly committed to the process and ready to price your company to sell.
- Wait too long to sell. Naturally, you want to sell your company when it fetches its highest value. Like selling a stock at its peak, it’s a very difficult thing to do. Most business owners are so caught up in their own success that they believe it will last forever. A company’s fortunes, however, can change quickly, and not always for the better. Remember that buyers will only pay top dollar for a company with a positive growth trajectory.
Action Item: Begin the process of selling soon if valuation estimates meet your expectations, your business is going well, and you have a reason to sell. (retirement, health, family, etc.)
- Failing to fix important problems. During due diligence, buyers will uncover problems. Every business has them! One example is customer concentration. If one customer accounts for more than 20% of your revenue, it will raise a red flag with buyers.
Action Item: Identify the top 5 problems in your company and either fix them or start on a plan to fix them prior to bringing your company to market. Buyers will appreciate the fact that you’re identifying and actively working on these issues.
- Your business is too reliant on you. Most buyers, particularly private equity groups or other sophisticated buyers, aren’t looking to buy your company so they can get a job—they’re looking for an investment.
Action Item: Before going to market, hire a manager who is capable of handling the majority of your duties.
- Treat confidentiality lightly. You’ve decided to sell your business and can’t wait to tell your friends and family. No problem, right? Wrong! Until a transaction is completed, sharing the news of your pending sale could negatively impact the value of your business. Competitors will use the information to go after your customers. Employees will become distracted and worry about their future job security.
Action Item: Keep your plans to yourself and the inner circle of people involved in the M&A process. Everyone else, like potential buyers, should sign an NDA before being informed that your business is for sale.
- Take your eye off the finish line. It’s only human to visualize how you’ll spend your time and money when you sell your business. While you are dreaming of the exciting changes to come, be sure to stay grounded in business fundamentals, such as pursuing new opportunities, making important decisions, and taking care of your customers. It may take more than a year to sell your business.
Action Item: Prepare for it to take a year before your deal closes and allocate sufficient time to the process to make sure it stays on track.
- Go at it alone. As an entrepreneur, you’re used to taking charge and doing things yourself. When you are ready to sell your business, you will want experienced professionals on your side. A seasoned investment banker will manage the bidding process to maximize your company’s value. Investment bankers will connect you with the specialized accounting and legal resources you will need.
Action Item: Find an investment banking firm that has a track record of selling businesses that are similar to yours
About the Author
John Norton is a Managing Director at ACT Capital Advisors. Over 25 years, he successfully built and sold multiple businesses. John can bring together the right team to market your company to a wide group of qualified buyers – and find the best buyer for you. John can be reached at: jnorton@actcapitaladvisors.com.
