Pitfalls Are Common When Selling Business
BY LINDA STIRLING
Special to the Business Journal
If you’ve spent years building a strong business, putting it up for sale is an important and often difficult decision to make.
A successful sale requires specialized skill, unique dedication and steadfast focus.
Many sellers of mid-sized companies often harbor misconceptions that hinder their ability to sell their business for maximum value. They may approach too few buyers, wait too long or not sufficiently prepare for this major transaction. Here are some common pitfalls faced by business owners that you can avoid making yourself.
First would be only negotiating with a single buyer. Most business owners fear all their customers and competitors will learn that their business is for sale, causing good employees to leave and customers to purchase elsewhere. As a result of this fear, business owners often try to negotiate a sale with only one buyer.
Unfortunately, negotiating with one buyer generally won’t result in a premium valuation because that buyer knows there is no competition. In addition, there is no sense of urgency in moving the sale process along. Such talks can drag on for months, or even years, with no transaction occurring.
You should be cognizant that much of their concern regarding confidentiality is misplaced. Mergers and acquisitions are common events today. Approaching only well-qualified prospective buyers and keeping discussions about the sale with only the senior-most executives in the buyers’ organization can minimize leaks.
You should enter negotiations cautiously and speak confidentially with only trusted parties. A business owner also should feel comfortable approaching an experienced financial adviser who can help minimize potential leaks by demonstrating how to provide an appropriate level of information in a controlled sales process.
– Waiting Too
Long To Sell
Oftentimes business owners wait to sell their business until market conditions are perfect. The danger in waiting too long is you may end up having to sell your business a year later for less because your industry suddenly dropped. Also, if you wait too long, you risk losing your best customer. If you have a solid customer lead now, there should be little reason to wait. Another risk you take by trying to time market conditions is a drop in your business’s revenues. If this happens, you can bet that the price you’ll get for your business will shrink.
Along the same lines of waiting too long, sellers might set too leisurely a pace. If you don’t create a sense of urgency, a buyer may feel there’s no competition and try to reduce the price.
If your business remains for sale too long, potential buyers will be scared off and wondering why it hasn’t sold. Your best employees, fearing for their futures, may leave, which can erode your company’s profitability and salability.
Your company will sell as long as it’s a strong buy and there’s reason for a buyer to purchase. While market conditions can affect the sale price of your business, a strong company can overcome market barriers. After all, circumstances may arise that will force you to sell your business sooner than later and you’ll need to be prepared to sell regardless of market conditions.
– Problems Arise From
Inadequate Preparation
Selling a business is one of the most significant decisions in a business owner’s life.
Oftentimes, sellers don’t realize the long-term planning that goes into their sale and therefore don’t get the maximum value for their business. If you expect to put your business on the market anytime during the next five years, you should begin preparing for the sale now. Your preparations should cover both the financial condition of your business and its day-to-day operations.
Start by having your business’s financial statements audited by an independent accounting firm. Audited financials can add credibility to your record of achievements. The longer the period covered by audited financials, the better. A good rule of thumb is to show audited records for three to five years.
It also is a good time to focus on building an effective management team. Having a proven team in place for at least three years before the sale may boost potential buyers’ confidence in the company’s ability to operate successfully without you.
If your business relies on a single main supplier or one primary customer, work to diversify your vendor and customer base and other customer relationships. Potential buyers may worry about the business’s ability to maintain that major relationship without your presence.
Teach your customers and suppliers to rely on your management team, so that relationships are developed with the business rather than with you alone.
At least one year in advance, begin considering prospective advisors to assist you in the sale process. Besides a lawyer and tax adviser, many business owners enlist the services of an experienced business adviser.
An adviser’s access to a more expansive list of potential buyers, on a national or international level, can help increase your chances of selling your business for the best price. A business adviser also can help you:
o Determine an appropriate selling price.
o Develop a specific marketing program.
o Define the most viable buyer group and locate specific buyers.
o Prepare effective presentations for qualified buyers.
o Screen offers.
o Arrange agreeable terms with the purchaser.
Doing your homework and sufficiently preparing for the sale of your business can result in a quicker sale, a better price and/or more favorable terms.
Stirling is a first vice president and certified financial manager for Merrill Lynch in San Diego.