Original source: https://www.sacramentobusinessbrokers.com/post/common-mistakes-to-avoid-when-selling-your-business

Selling your business is a significant milestone, often the culmination of years, if not decades, of dedication and hard work. 

Having worked with many business owners as well as selling a business myself, I understand that navigating the complexities of a business sale is challenging. Mistakes in this process can not only diminish the value you receive for your business but can also lead to prolonged negotiations, legal complications, and even the derailment of the sale altogether.

The goal of this blog post is to share some of the common mistakes business owners make when selling their company. Hopefully, it will help you prepare more effectively, approach the sale with a strategic mindset, and increase your chances of a successful and profitable transaction. 

From undervaluing your business to neglecting daily operations, we will delve into each of these pitfalls, offering insights and advice on how to avoid them. Whether you are starting to consider selling your business or are already in the midst of negotiations, this guide aims to provide you with the knowledge needed to navigate this complex process smoothly.

Lack of Preparation

I've found that many business owners underestimate the intricacies and time required to facilitate a successful sale. 

Here are some questions you can ask yourself to understand your level of preparedness to sell your business.

• Do I have a clear exit strategy that aligns with my personal and financial goals post-sale?
• Have I clearly understood and planned for the time it will take to sell my business?
• Are my financial records, including profit and loss statements, balance sheets, and tax returns, up-to-date, accurate, and readily available?
• Have I sought legal and financial advice to identify and address potential legal and compliance issues in my business?
• Do I clearly understand my business's market value, and have I sought professional valuation services?
• How well-prepared is my business to operate under new ownership?
• Have I identified the ideal buyer profile for my business, and do I understand their potential motivations and concerns?
• Am I prepared for the emotional impact of selling my business and the lifestyle change that may follow?
• Have I planned for the financial implications of the sale, including tax consequences and personal financial planning?

It's helpful to start thinking about the answers to these questions as early as possible. Understanding their answers can help you develop a strategic plan for exiting your business.

Wrong expectations about the value of your business

When I talk to business owners, I like to ask them how much they think their businesses are worth. The answers I receive are all over the board. More often than not, they are too high. Businesses that sell for 3X gross sales are extremely rare.

Overestimating the Value of the Business:

What happens if you overestimate the value of the business?

Firstly, it will deter potential buyers. When buyers look at business for sales listings, they have a set of parameters in mind. If your company is priced outside those parameters, they move on to the next business. 

It also makes it very difficult to get the deal pre-qualified by an SBA-approved lender. Without pre-approved financing, you will miss out on the credibility and expanded buyer pool it brings to the opportunity.

Worst of all, it gives off the impression that you don't understand your own company.

The Consequences of Underestimating Business Value:

Conversely, underestimating the value of your business means leaving money on the table. This often happens when owners are not aware of the full potential of their business or overlook key value drivers like brand reputation, customer loyalty, or market position. 

In both scenarios, the inaccuracies highlight the importance of getting a professional valuation. This involves a thorough analysis of the financials, market trends, comparable business sales, and the business's unique value propositions. 

A correct valuation sets the stage for a fair and realistic sale process, attracting serious buyers and ensuring the business owner's efforts and investments are rewarded.

Neglecting Business Operations During the Sale

Maintaining a business's everyday operations during its sale is crucial, yet many owners inadvertently neglect this aspect. 

Selling a business is much more time consuming than most owners expect. It can divert attention from day-to-day business activities, impacting the company's performance and, consequently, its attractiveness to potential buyers.

The Impact of Losing Focus on Daily Operations:

When business operations suffer during the sale process, it can lead to declining sales, reduced customer satisfaction, and lowered employee morale. These negative shifts affect the current profitability and can devalue the business in the eyes of potential buyers. 

This happened in a recent deal. The company's profit dropped substantially during the sale process, and as a result, we had to reduce the valuation of the business.

The seller was unhappy, and so were the prospective buyers who were interested in the business.

Tips for Maintaining Business Performance During Sale Negotiations:

1. Delegate Responsibilities: Consider delegating the sale process to a trusted advisor, broker, or management team member. It helps you to stay focused on running the business.
2. Communicate with Your Team: As appropriate, keep your management team and key employees in the loop to ensure they understand their roles and the importance of maintaining business performance.
3. Set Clear Priorities: Identify critical business operations that must continue uninterrupted and allocate resources accordingly.
4. Monitor Performance Indicators: Monitor key performance indicators closely to identify and address any operational issues promptly.
5. Balance Your Time: Allocate specific times for sale-related activities and business operations management, ensuring neither is neglected.

By keeping the business operations stable and efficient, you not only maintain its value but may also enhance it, making it more appealing to prospective buyers. 

Ignoring Confidentiality

Confidentiality is a cornerstone in the process of selling a business. Failing to maintain it can lead to significant risks and consequences, potentially jeopardizing the sale.

Risks Associated with Breaching Confidentiality:

The disclosure of a business's sale can create uncertainty and instability. Employees may fear for their job security and start looking for other opportunities, key clients may reconsider their relationship with the business, and competitors might use this information to their advantage. 

Moreover, the leakage of sensitive information, such as financial details, business strategies, and client lists, can devalue the business, giving potential buyers an upper hand in negotiations.

Strategies for Maintaining Discretion During the Sale Process:

1. Use Non-Disclosure Agreements (NDAs): Ensure that all potential buyers and advisors sign NDAs before sharing detailed business information.
2. Screen Potential Buyers: Thoroughly vet potential buyers before disclosing sensitive information to ensure they have the means and intent to proceed with the purchase.
3. Control the Flow of Information: Release information in stages. Begin with general information and only provide detailed, sensitive data when there is a serious expression of interest.
4. Limit Internal Knowledge: Only share details of the sale with key members of your team who need to know. Explain the importance of confidentiality to them and the potential consequences of leaks.
5. Communicate Discreetly: Use secure, private communication channels when discussing the sale and avoid discussing it in places where you might be overheard.

Negotiation Errors

Effective negotiation is vital to successful business sales, but it's also prone to critical errors. Two common pitfalls are failing to negotiate effectively and focusing too much on price while neglecting other important terms.

Failure to Negotiate Effectively:

Ineffective negotiation can arise from inadequate preparation, lack of understanding of the buyer's interests, or inflexibility. This can lead to prolonged discussions, eroded trust, and potentially the deal's collapse. 

To avoid this, it's crucial to:

• Understand the buyer's motivations and constraints.
• Be clear about your own non-negotiables and flexible areas.
• Develop a strategic approach to the negotiation, considering the timing, sequence of offers, and counteroffers.

Overemphasis on Price at the Expense of Other Terms:

Focusing solely on the selling price can overlook other critical aspects of the sale agreement that may be equally important. Terms like payment structure, earn-outs, the training period for new owners, and non-compete clauses can significantly impact the final outcome. Balancing the price with these terms is essential for a deal that benefits both parties. 

To maintain this balance:

• Prioritize your terms according to their importance and impact on your post-sale objectives.
• Be prepared to make trade-offs between price and other terms.
• Understand how different terms can complement or compensate for the selling price.

Pro Tip: Don't give away your training for free! Include the option to stay on as a consultant at an hourly rate. The buyer will need more help than they expect, and you deserve to be compensated for your time.

Avoiding these negotiation errors involves thorough preparation, clear communication, and a strategic approach to the entire negotiation process. This can lead to a more balanced, mutually beneficial deal.

Not Engaging Professional Help

The expertise of advisors like business brokers, lawyers, and accountants in the sale of a business helps keep the process on track.

The Role of Business Brokers, Lawyers, and Accountants:

• Accountants: They play a key role in preparing financial statements, advising on tax implications of the sale, and ensuring that financial records are accurate and presentable.
• Business Brokers: They bring expertise in valuing your business, marketing it effectively, identifying qualified buyers, facilitating negotiations, and ensuring you get the best possible deal.
• Lawyers: They are crucial for reviewing and drafting legal documents, ensuring compliance with legal standards, and providing advice on the legal implications of the sale.

Risks of Navigating the Sale Process Without Expert Assistance:

• Undervaluing the Business: Without professional valuation, there's a risk of setting the price too low, resulting in financial loss.
• Legal and Financial Complications: Overlooking legal and tax aspects can lead to costly disputes or liabilities post-sale.
• Inefficient Sale Process: Professionals streamline the sale process, saving time and resources. Without them, the process can become drawn out and inefficient.
• Missed Opportunities: Professionals can identify and leverage opportunities within the market to optimize the sale terms, which might be missed when handling the sale independently.

Engaging with experienced professionals ensures a well-managed sale process, minimizes risks, and maximizes the value you derive from the transaction.

Ignoring the Buyer's Perspective

Overlooking potential buyers' perspectives and expectations is a common mistake in business sales. Understanding and addressing a buyer's needs is crucial for a successful transaction.

Understanding the Buyer's Needs and Expectations:

• Motivations: Different buyers have varied motivations. Some might seek growth opportunities, while others might be looking for strategic acquisitions. Understanding these motivations can shape your selling strategy.
• Concerns: Buyers often have concerns about the business's profitability, sustainability, and scalability. Addressing these concerns upfront can make your business more appealing.
• Vision: Recognizing a buyer's future plans for the business helps align your pitch and ensure a good fit.

Importance of Transparency and Trust-Building with Potential Buyers:

• Honest Communication: Transparency about the business's strengths and weaknesses builds trust. Misrepresentations can lead to deal breakdowns and legal issues.
• Disclosures: Proactively disclosing operational, financial, or legal challenges demonstrates integrity and aids in building a foundation of trust.
• Building a Relationship: Establishing a rapport with buyers isn't just about making a sale; it's about ensuring the legacy and continued success of your business in the right hands.

Focusing on the buyer's perspective facilitates a smoother sale process and contributes to the long-term success of the business post-transition.

Conclusion

Selling your business is more than just a transaction; it's the culmination of your hard work and dedication. Throughout this blog post, we've explored common mistakes that business owners make when selling their company and provided insights to help you avoid these pitfalls, ensuring a more effective preparation and strategic approach to your sale.

If you have any questions about the process of selling a business, or need help with a valuation, contact us for a consultation.

At Sacramento Business Brokers, we work with business sellers and buyers through Greater Sacramento, including Roseville, Rocklin, Folsom, and Granite Bay.

Authored by: Luke Middendorf, Business Broker