5 Mistakes Owners Make
When Selling Their Businesses
Many business owners reach a point in their careers when they are ready to sell their businesses and move on to another chapter in their lives whether it’s a new venture, a geographical move, or retirement.
While many business owners are excellent leaders who manage their businesses well, when it comes to selling their businesses, they often run into problems due to the complexities of preparing a business for sale, finding a buyer, and closing a deal that is acceptable to both parties.
Here is a list of the biggest mistakes owners make when selling their businesses:
1. Making the business dependent upon their personal relationships and unique technical skills: most business owners start out as technical experts and then develop leadership and managerial skills over time. However, if your business is too dependent upon your ability to sell, to maintain customer relationships, or perform technical services then it will be very hard to sell your business to a buyer who does not have those same selling skills, customer relationships, and technical abilities. It is essential for every business owner to develop repeatable processes that can be written down, learned by new employees, and executed in a reliable and high quality manner WITHOUT the daily involvement of the owner. A business that can operate at a high level without the intimate involvement of the owner will be able to be sold at a much higher price than an owner micromanaged business.
2. Waiting until they are ready to retire to sell their business: many business owners think that when they are ready to retire they will be able to sell their business and walk away. Unfortunately, many business owners learn the hard way that most buyers will require, from the seller, a reasonable transition period (months or possibly a year or two) In order to ensure that their investment produces the desired results in terms of cash flow, revenue growth and in order to ensure a smooth transition to the new management team. A business owner who is either unable or unwilling to continue working (as an employee or consultant) under the leadership of the buyer will find the offers to be much less attractive if they are received at all. One exception to this rule is if the business processes are well established and the employees of the company already operate effectively without the daily involvement of the owner (see #1).
3. Assuming that potential buyers will place the same value on the business as the owner: because business owners are intimately involved in the details of their businesses including the products/services, expenses, cash flows, assets, etc, they generally value their companies at a higher level than what a disinterested buyer would value it at given their understanding of the financials and an outsider’s point of view. It’s important to remember that a buyer must be convinced that a business has a certain value. Fortunately there are various steps an owner can take to demonstrate the value of the business to most potential buyers.
4. That a buyer will be willing to pay the same amount of money for a company that is organized as a ”C” Corporation vs a corporation that has made a Sub S election: without getting into the weeds of federal and state tax law, a seller of a Sub S election corporation can take advantage of mostly low long-term capital gains taxes while allowing the buyer to obtain a step up in basis to the full extent of the price paid for the company with extensive depreciation of tangible assets and amortization of all intangibles including goodwill, where as a seller of a “C” corporation would have to pay much higher taxes on the same sale and the buyer would not have the same depreciation and amortization allowance ultimately resulting in higher taxes for the buyer. If you are organized as a “C” corporation and you do not need a complex capital structure including different types of shares (voting and non-voting) then make the move to a Sub S election and (after a 5 year waiting period) you will be able to profit from the preferential tax law during the sale of your business.
5. Operating their businesses using non-standard methods and processes: many successful business owners operate their businesses and keep track of all the financial details in a unique way that is familiar and easy for them to understand and communicate within the team. However, when selling a business, the owner typically must translate their systems and financial data into a language and format that the average buyer can understand and appreciate. Many owners underestimate the amount of work involved to “clean up” the company in terms of financial statements, budgets, and business processes. It is essential to have at least 3 years of financial statements and monthly statements for the current year, up to date tax returns on hand, copies of all relevant customer, supplier, and employee contracts/files in order to give the prospective buyer confidence that the business is healthy and will continue to operate and grow as expected.