Mistakes to Avoid When Selling Your Business
Selling a business for most owners is a once in a lifetime
event.
The owner is very experienced in running the business, but is typically a
novice in selling a business, which can lead to critical mistakes. Mistakes
most owners cannot afford when the business represents a majority of
the owner's net worth.
Given those parameters, here are some thoughts to assist
you through the process.
1. A business is only worth what a willing buyer will pay
for it. There are plenty of valuation formulas, but the market is the reality
test.
2. Clean up your balance sheet and check it for hidden
values.
3. Market your business. The more potential buyers, the more likely you will get your asking price.
4. Confidentially. Do not make it public information - that you are For Sale. Bad things will usually happen. The competition will use it against you, employees will look for other employment, your vendors may leave you, et cetera. The biggest risks in selling a business is the risk that the business will deteriorate while the management is focused on the selling process. The owner will not have time to manage his business as he did in the past. The selling process is very time-consuming, with management focused on negotiating with buyers and dealing with the attorneys, accountants and other professionals who may be involved in the process. Investigate any potential buyer; speak with other individuals who have sold to this buyer. What is the buyer's reputation for keeping his word?
5. Tax Avoidance. Check with your accountant for the best way to structure the
sale. Allocation of the sale price can
produce major tax savings, C Corporations have the possibility of double taxes,
stock or asset sale. Remember, it is not
what you sell if for, it is what you get to keep!
6. Seller Financing. Most banks will require it and the SBA will in most cases demand it. If you are going to be a bank for the buyer, you should require collateral securing the debt or personal guarantees by at least two separate parties. And your approval to be their banker is required.
7. Be very careful about taking stock.
8. Earn-Outs. In these economic times, Earn-Outs are often
part of the terms and conditions for a sale. The earn-out concept is often very useful in bridging the gap
between what a starry-eyed owner thinks his business is worth and what a buyer
is willing to pay given the risks involved.
Owners will have to make a business decision on this one. If the buyer is well financed and has a good
business plan, this could be very lucrative for you.
9. Buyers are always smarter than the seller thinks they
are. Never try to hide anything about
your business. The buyer will find it, the trust will be lost and the deal will be killed.
10. Be prepared to
sign at least two agreements: a)A Non-Compete Agreement and b) A Transition Agreement, defining how you and the buyer will work together, your responsibilities, compensation, et cetera after to
sale.
11. Hire
professionals to help you.
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