There are some common mistakes people make when selling a business. To help you avoid these mistakes, here are the top things to watch out for when selling your business:
1. Plan Ahead for a Smoother Sale Process
Selling a business is not a snap decision; it’s a process that requires careful consideration and preparation. To set yourself up for a successful sale, it’s essential to plan well in advance. This means thinking ahead, outlining your objectives, and understanding what your business is worth in the current market. Waiting until an offer is on the table can lead to hasty decisions, missed opportunities, and regrets.
Have a competent third party provide you with a written valuation of your business. Failure to do so will result in you second-guessing whether or not the offer is reasonable, which could result in you declining a perfectly good opportunity.
2. Prepare a Confidentiality Agreement
Sharing sensitive information during a business sale can be risky, but a well-crafted “Confidentiality Agreement” or “Non-disclosure Agreement” can offer essential protection. This agreement, crucial for both the seller and the buyer, establishes clear guidelines for the exchange of information. It’s vital to ensure the document includes provisions safeguarding your business, yourself, and the potential buyer.
Furthermore, incorporating non-interference clauses is equally essential. These provisions shield you from the risk of the buyer luring away your customers, suppliers, or employees, ensuring a smooth transition. If your business harbors any confidential processes or formulas, it’s paramount to maintain their secrecy until the deal concludes and the funds are securely deposited in your bank account. This careful approach can prevent any potential complications or misappropriation of critical business assets during the negotiation phase.
3. Evaluate Potential Buyers
When it comes to evaluating potential buyers for your business, take your time to assess their financial readiness. Before sharing sensitive details, ensure the buyer possesses the necessary financial capability to follow through with the transaction. Seek assistance from your accountant or banker to scrutinize the buyer’s equity and eligibility for a bank loan, assuring you of their financial stability.
Beyond the mere ability to afford the purchase, try to ascertain whether the buyer has the expertise to effectively manage and grow the business. The combination of financial resources, managerial skills, and a genuine drive for success, often referred to as the 3 M’s – Money, Management, and Motivation, is pivotal for a successful handover. Assessing the buyer’s business acumen and long-term vision can safeguard against the risk of a future downturn under their ownership.
By prioritizing the evaluation of the buyer’s financial capacity and assessing their potential to sustain and improve the business, you set the stage for a more secure and seamless transition. This comprehensive approach not only protects your business’s legacy but also fosters the potential for its continued growth and success under new ownership.
4. Never Provide An ‘Asking Price’
Refrain from disclosing an explicit “asking price” when selling your business. A skilled buyer typically possesses the expertise or has access to professionals who can accurately evaluate your business’s worth. They understand that the value of a business is more than just its monetary aspects. Establishing an inflated asking price could deter potential buyers while setting it too low might mean you’re undervaluing your hard-earned enterprise.
Recognize that each buyer approaches the deal with their own motivations and perspectives, resulting in a range of perceived values. What your business signifies to one buyer might not hold the same significance for another. Presenting a fixed asking price can limit the buyer’s flexibility in conceptualizing innovative and mutually beneficial transaction structures.
Emphasize the importance of open and transparent negotiations to enable both parties to explore creative solutions that align with their respective goals. By fostering a collaborative approach without rigid price constraints, you create a deal that optimally reflects the true value of your business. This approach not only maximizes your financial gains but also sets the stage for a mutually beneficial and harmonious business transition.
At Robbinex, we represented a client whose business was valued at $900,000 for shares. Four offers were received from four serious buyers, all qualified to know what the business was worth to them: $1.3 million; $1 million; $650,000; and $400,000. Each had different terms and conditions, with the best offer being the one for $1 million.
5. Never Sign Anything That Your Lawyer Hasn’t Reviewed In Detail
Make sure you never sign anything without letting your lawyer look at it closely. This goes for any papers related to selling your business. Your lawyer can check for any problems and make sure you’re not agreeing to anything that could hurt you. They know the law and can explain things to you so you understand.
Having a lawyer look over things keeps you safe from getting into any deals that might cause trouble later. They can help you understand what the papers say and if there’s anything you need to change. It might cost a bit, but it’s worth it to avoid any big problems down the road. So, before you put your name on anything, let your lawyer take a good look at it.
There was a recent case wherein the simple addition of a comma had a 2.5 million dollar impact on the value of the transaction.
6. Have an Accountant Review Your Proposal
Before putting pen to paper, ensure your accountant has carefully analyzed the proposed deal’s “tax impact.” Even a minor adjustment in the allocation or restructuring can result in substantial savings, potentially amounting to hundreds of thousands of dollars. Seeking your accountant’s expertise in this regard is critical to understanding the financial implications of the agreement and maximizing your gains.
Allowing your accountant to learn the specifics of the proposal can shed light on any potential tax advantages or disadvantages associated with the transaction. They can provide insights into how different allocation strategies or structural modifications may affect your tax liabilities, highlighting opportunities for optimization.
We were once involved with a transaction where the initial estimate of income tax due from a transaction was close to a million dollars, and after the tax accountant made several recommendations, the tax bill was reduced to approximately $85,000.
7. Don’t Negotiate With The Buyer Directly
Steer clear of direct negotiations with the buyer to prevent potential conflicts that may jeopardize the transaction. Intense negotiations can trigger emotional responses leading to regrettable comments that might delay an otherwise promising deal. An adept intermediary serves as a neutral party, devoid of emotional investment, and capable of maintaining a composed and business-oriented approach throughout the negotiation process. Their role is pivotal in fostering effective communication between the buyer and the seller, ensuring that discussions remain constructive and productive. By relying on an intermediary, you create a professional buffer that facilitates smoother negotiations, minimizes misunderstandings, and safeguards the integrity of the transaction.
We were called in to sell a large retail chain and learned that the owner had been in negotiations with a large competitor. The opening offer made by the competitor was quite low and the seller made known their feelings about the low offer and what they thought in no uncertain terms. The transaction died. Research indicated to us that this competitor would truly benefit from completing this acquisition and in less than two hours we were able to obtain an acceptable offer.
8. Maintain Confidentiality
Keep things secret no matter what. If you don’t, you might lose important workers, buyers, or suppliers. It’s important to keep private information about your business safe. This way, you can make sure everyone stays with you and your business stays strong.
When you keep things confidential, you show that you can be trusted. This helps to keep your workers, customers, and suppliers happy and loyal to your business. Make sure everyone knows how to keep things private, so your business can keep going smoothly without any big problems.
For example, a business owner was the victim of a rumor that said their business was for sale. It wasn’t. They lost 2 key employees within weeks, and the reason given for leaving both employees was “they had financial obligations and couldn’t afford to run the risk that a new owner would not keep them.”
Selling your business can be a complex and challenging process, but with the right approach, you can navigate it successfully. By avoiding common pitfalls and following essential guidelines, you can ensure a smoother and more profitable transition.
Remember to plan ahead, seek professional valuations, and safeguard your confidential information. Qualify potential buyers meticulously, never fixate on an asking price, and always seek legal and accounting expertise. Furthermore, maintain confidentiality rigorously and consider involving a competent intermediary to handle negotiations.
Each step in the selling process demands attention to detail and a proactive mindset. By prioritizing these precautions and best practices, you not only protect your business’s value but also lay the groundwork for a seamless transition that benefits all parties involved.
With the right strategy and approach, you can successfully sell your business while securing its legacy and maximizing its value.
Robbinex has accumulated knowledge based on almost five decades of experience and approximately 450 closed transactions. Factors we believe are successful to the sale of a business include:
- Client motivations, including fully understanding the goals of our clients
- Proper preparation of a business for sale
- Comprehensive preparation of the information required by investors
- Effective execution of a transaction, supported by the proven Robbinex Three-Phase Process™ for selling a business