There are a number of common shortcomings that can hinder the selling process long before it gets to the closing table.
These mistakes often vary from poor record-keeping to failure to obtain a valuation or organize basic documentation needed to engage a potential buyer in the due diligence process.
You can avoid the many frustrations and challenges many sellers experience by gathering the information you will need upfront and having a clear idea of what outcome you are seeking.
So as you consider selling your small business, remember that you’re not at the finish line yet, and developing a plan will help make the process easier and less stressful. s.
To help you get prepared, we have put together a list of 5 common mistakes that business owners often make when seeking to sell their business and steps that you can take to avoid these 5 mistakes to increase your chances of a successful outcome.
Mistake #1: Poor Record-Keeping
As part of the due diligence process, prospective buyers will need detailed financial records of the small business for sale. If bank financing is involved, the bank will require all your financial records as well.
You will need at least three years of profit and loss statements, a current (and accurate balance sheet), and a forecast for revenue and major expenses for the next 2 – 3 years. Not having this ready not only creates a delay in the process but can also raise concerns from a prospective buyer.
Here’s an important area to pay attention to:
In addition to financials, gather key legal agreements, contracts, and formation documents. As stated earlier, an interested buyer is going to conduct due diligence and will want to review all your contracts, leases, loan agreements, and documents from when you formed the entity (LLC, Corporation, etc.) Have these documents collected, complete and well-organized.
Tax deductions — even if the deductions are legitimate, they sometimes lower the profitability of the business and may require explanation, so consider scaling back on them in anticipation of a sale or noting major discretionary expenses when sharing financials.
Mistake #2: Marketing To Potential Buyers Before You Are Prepared
As the saying goes, you have one time to make a good first impression. Many owners have a passion for their business that comes across when talking about their business. Some can go into detail about the performance of the business, great customers or loyal employees that have helped grow the business. While this is important, a potential buyer will soon ask for detail that back up a seller’s enthusiasm for the business. In addition to requesting things like financial reports, contracts and other important agreements, skilled buyers will do their own research.
Many start with looking at online reviews as well as publicly available information from places like the Better Business Bureau, tax records and other local entities that track businesses in their community. Buyers will often ask others in the community about the business, making calls to supplies, partners or others that may have an opinion on the business. It is important to know what they will find before you engage in any outreach.
Do what you would expect a buyer to do by checking online review sites and local government entities and where necessary, update and clean up outstanding items or potential issues. If you cannot control what is there, say a negative review, be prepared to address what happened and steps you took to remedy the situation.
Bottom line, take the time to do your preparation to avoid being blindsided by something easily found by a prospective buyer.
Mistake #3: Setting Unrealistic Value or Having Unrealistic Expectations
It’s not unusual for a business owner to have a bias of what their business is worth. After all, you have worked hard and believe in the future of the business.
A valuation will be far more objective and analytical. A method often used is Discounted Cash Flow Analysis which uses three years of profit and loss statements, a balance sheet, and anticipated future cash flow. I then take s into account the attached risk, and the current market pricing will influence the price.
Sellers that conduct a valuation process before engaging a buyer often have a more objective view of what the business is worth and are better prepared to engage prospective buyers. , as.
Mistake #4: Not obtaining proper guidance.
There is no need to pay unnecessary fees for things you can do on your own. That said, if you are like most owners, you have never been through the process of exiting a business. It is often a one-time event. Be careful not to compromise your exit process in a bid to save money. Failure to seek professional guidance during the exit process can not only put all the necessary work on you, it increases the chances of making costly mistakes.
An option is to work with an attorney, a financial analyst, or a business broker to help handle the process.
Another route to this is to take advantage of technology and use a service like ExitGuide Pro that gives you the necessary tools and guidance during this process.
Mistake #5: Taking A Hands-Off Approach or Not Managing The Process
If you engage professional help, you will still need to generate financial reports, find agreements and other documents so experts can review them and perform analysis and help you to prepare and engage potential buyers.
No matter how hard your team works to market your business, no one has more inside knowledge about the business than you. You will not only need to answer questions and help market the business, you may need to agree to stay engaged post-sale to help transition the business to a new owner.
In conclusion, selling your business requires time and preparation. If you follow the listed advice and avoid these 5 mistakes, you’ll be on track to make the sale happen for the right price and on the right terms.
Eric Grafstrom is the founder and CEO at ExitGuide. He has over 20 years of experience working in leadership roles for numerous companies and has experience with a range of exits including sale to a third party, management buyout, asset purchase agreements, and dissolution.
