It’s easy to make mistakes when you’re a first-time seller. No matter how successful your business or how well you know it and your industry, you may not be prepared for the complexities of preparing to sell, finding a buyer and negotiating a deal. To help ensure that your transaction is profitable — and actually crosses the finish line — be sure to avoid these common mistakes:
Poor financial reporting
Sloppy accounting and inaccurate financial statements probably turn off more buyers than any other seller mistake. That’s why you need an outside accountant to prepare reviewed or, better yet, audited financials at least two years before you try to sell your business. Private companies aren’t required to adopt Generally Accepted Accounting Principles (GAAP). But you may want to consider it anyway — particularly if your prospective suitors are public companies, which are required to follow GAAP.
Emphasizing your role
It’s natural for owners to be proud of the business they’ve built and to let sellers know how much it depends on them to run smoothly and profitably. But keep in mind that what buyers want is a business that will run smoothly after the current owner has moved on. So instead of tooting your own horn, talk about the strength of your management team and explain how a buyer might easily integrate operations and employees into its own organization. If a potential buyer is still concerned about losing your leadership and expertise, you might offer to remain for a specified period after the sale to help with integration and to train successors.
Owning real estate outside the company
Many owners remove assets from their company as a way to create financial security. Unfortunately, this can leave buyers with too few assets to borrow against. Some banks have tightened their lending requirements, making financing an acquisition challenging for buyers. Make sure you’re helping, not hindering, buyers.
Setting a high asking price
Although many sellers set an asking price as part of an offering, consider leaving off the price tag — at least initially. Instead, let buyers get interested first, and then they can start bidding. If bids aren’t as high as you think they should be, consider whether your expectations are realistic. Because of the emotions attached, founding owners in particular tend to overestimate the value of their business. But buyers base their bids on objective information (for example, your company’s assets and financial statements, and potential cost synergies). For more information on this topic, see our article on determining your “walk-away” price here.
Excessive personal business within the company
Because it lowers taxable profits, many business owners include some personal expenses inside their company. Buyers understand and accept this and similar tax-minimizing practices—up to a point. Just make sure that such expenses are easy to explain and that your accounting methods don’t come across as convoluted or deceptive. You can help prospective buyers understand what the company would look like under new ownership by providing an “adjusted” statement that presents your financials without unnecessary or extraordinary expenses.
It’s also common for small businesses to employ family members. This can make selling your company more difficult if buyers are confused or skeptical about family members’ individual contributions. Buyers may also worry about whether these employees will stay on after the sale and, if so, whether they’ll remain motivated to work hard under new ownership.
You can help avoid all of the above pitfalls by working with experienced professionals. At a minimum, consult an M&A advisor or investment banker and an attorney. And if you’re entering retirement, be sure to discuss your plans with your wealth adviser and planner. To learn more about our transaction advisory services, please contact us here or by telephone at (949) 482-1850.