By Dan Messina
Over 70,000 small businesses are bought and sold each year. Someday, your business may become a part of that number. When I sold my business, I ran into the perfect scenario. I can’t say that I was ready to sell my company, but two buyers came to me, and I had to make a decision. It is important when you are ready to sell your business that you are prepared to sell.
You, as the owner, must be ready, and, more importantly, your company must be ready to sell.
When I thought I was ready to sell my business, I let some people know I wanted to sell, and they came in and took a look at my business. This was a very valuable lesson for me. By the time they were through evaluating my company, they offered me almost nothing to come in and take over. My wife and I were in shock because we thought we were a good company, and we were, but it just wasn’t ready for to be sold.
For the next 18 months, we worked hard to prepare for a sale if that time ever came again. It did, and we were ready for that time; as a result, we received premium dollar for our company. Here are a few things we did to make our company marketable.
The most successful sellers are meticulous about getting pre-sale preparation right. Here are some of the most common mistakes business sellers make during the preparation stage and some helpful tips on how you can avoid them as you move closer to the sale of your company.
1. Going Solo
One of the biggest mistakes business sellers make is trying to do everything themselves. Very few owners have the time or experience to handle selling a company alone. Business brokers, exit planners, accountants, appraisers and other sale professionals streamline the process and ensure that your company is truly ready for prospective buyers. I developed a team to help me. I wanted to keep the expenses to a minimum, so I did not use a broker because they can become a big expense. I used a business appraiser and a lawyer to help with my plan, and you do want to have a plan when selling your business. Pulling together a talented team of advisers should be one of the first things you do after you decide that it’s time to sell.
2. Starting the Process with Misguided Expectations
First-time business sellers often have unrealistic expectations. For example, many sellers believe their companies are worth more than actual market value and are then disappointed when their (over-priced) business doesn’t sell quickly…or at all. There is a formula used when buying and selling a business, and it revolves around your profit and assets.
During the preparation stage, it’s important to right-size your expectations. By evaluating the recent sales of similar businesses in your area, you can gain more realistic insights about average sale prices and how long it typically takes to sell a business like yours. Through consultations with your advisory team and other experts, you can also identify the types of concessions sellers or buyers have made to close deals. Try to show a good profit margin for several months and lower your debt as much as possible before selling.
3. Getting the Timing Wrong
Your personal feelings aside, it may or may not be the right time to sell your business. While a strengthening economy is certainly helpful, it doesn’t necessarily mean that the business succession market is ripe for every business in every industry. Even if the market looks good, it’s possible that your position could be stronger six months or a year down the road. I waited 18 months before I was ready to sell just to make my numbers better.
Determining the best possible time to sell your business is tricky. But, by consulting with your advisory team, putting yourself in a buyer’s shoes, and identifying the outcomes you want to achieve early in the process, you can uncover insights that impact the timing of your sale. In some cases, it may be better to wait until you have improved the company’s financials or until the market is more likely to deliver your desired sale outcomes.
4. Incorrectly Valuing the Company
Valuation is a tricky process. Although there is a tendency for sellers to inflate the value of their companies, it can be equally dangerous to undervalue your business. If the asking price is too low, you may leave money on the table, or, worse yet, buyers may assume there is a problem and move on to other opportunities.
While your own insight and quick, easy-to-use valuation tools are a good starting point, ultimately, you need the objective valuation provided by a qualified third-party. Commercial appraisers and business brokers who offer valuation services understand the marketplace and have the expertise to provide an accurate measure of your company’s real value. Considering that your business is likely your most valuable asset, it pays to get the price right. I contacted a company that helps appraise businesses and get them ready to sell. It only cost me $500, and this company determined the asking price based on the information I provided him; they provided a nice package to present to the buyer. It was very professionally presented, which helped me get the price I was looking for.
5. Not Spending Enough Time on Preparation
Many business sellers are surprised by the amount of time and effort it takes to properly prepare a business for the marketplace. From determining value and setting the right asking price to compiling historical financials and other documents, a multitude of tasks need to be performed before you list your business.
At a minimum, you should begin the preparation process six months to a year before you intend to sell the business, and, ideally, preparation starts several years in advance. In addition to allowing you to complete all of the necessary preparations, longer lead time gives you time to increase earnings or improve your company’s competitive position, making your business more appealing to qualified buyers.
There are no guarantees in selling a business, and you can never be completely assured that you will achieve all of your objectives in the sale of your company. But, business owners who approach exit planning systematically and methodically are more likely to maximize their business sale prices and sell on their own terms. To do it right, be sure to start preparing well in advance of actually listing your business for sale.
As I mentioned, it took me 18 months to get my company ready to sell. Here are some of the things I worked on during that 18 month period.
We wrote down 5 things a buyer gets when they buy a company. I then worked on those 5 things to make them strong.
- Customers – I made sure all my good customers were happy and would stay with me even if I sold my company. It is important for a buyer to know they will not lose anyone if a new owner comes in. I took my bad customers and made them better, and, in some cases, it was better for me to get rid of them before I sold.
- Services – I evaluated all my services and made sure I had all the proper equipment to provide these services. I added new services when necessary to improve my financials.
- People – I made all the necessary promotions before I sold so my good employees were happy they were just promoted, and I took a close look at all my trouble-makers to make sure they would not create problems. I also made sure the buyer was going to take care of my staff because I worked hard to develop a good staff.
- Reputation – I took a close look at how I was perceived in the market and that my reputation was good in the marketplace.
- Performance – I made sure that if the buyer talked to my customers that they would all say my performance was great.
Now that you prepared the company for sale, now it is time to prepare yourself for the sale of your business. The first rule of thumb is if someone comes to you and offers more than the company is worth, it is time to sell.
Here are a few signs to look for to help you sell or not sell:
- “I really like what I am doing so the thought of selling is premature.”
- “I need to sell because I am nearing retirement.”
- “There is no longer that fire in my belly, and I worry I am losing interest.”
- “My bottom line tells me I can finally get my price.”
- “I have received an unsolicited offer, so maybe now is the time to sell.”
- “I do not want to abandon the people who stood alongside me over the years.”
- “I am not ready to turn this business over to the next generation.”
- “I am eager to write that next chapter in my life.”
Some combination of the above invariably leads to knowing “when the time is right.” You need to be proactive. The precise timing of an exit is driven by a mix of business and personal factors. Simply put, it is a real-time, deep-dive look at the world that surrounds you and your company.
Do your personal assessment.
What matters most in your everyday private life? Does your company still take precedence? Are you alert to how you have changed? Are you honest with yourself? Are you prone to procrastinate or too slow in coming to terms with your present state of mind as it relates to the sale of your company?
The relevant question that should capture your immediate attention is…why now? First, recognize when you are near or at this strategic crossroads.
Second, grasp the meaning and significance of what you are feeling inside. Third, and perhaps most important, initially refrain from sharing with others in your inner circle. Allow time for private thought and try to read your own tea leaves. It’s good therapy. Eventually, you will know whether and how to reach out for guidance.
Trust your advisors.
Selling one’s company deals with a completely different set of circumstances and uncertainties. Successfully navigating across this murky landscape requires a telescopic lens that allows the business owner to see things from a distance. Unfortunately, being too close to the ground also means being prone to poor judgment or overreaction. The analysis must be approached from two very different perspectives as illustrated above [which are frequently in conflict with one another].
Put your professional advisors to the test in (1) helping you reason whether you are personally ready to exit and (2) evaluating whether your company is also ready. The stakes are at their highest and, ironically, taking this intermediate step to reach out to seasoned financial and legal advisors can be the best decision you ever made.
There are two tax considerations for the seller no matter what type of business entity you have:
- How is the income from the sale taxed? As ordinary income or capital gains?
- When is the income taxable?
The tax part of the sale is the most important part of the sale, and I will let you work this out with your accountant.
This will be the most exciting time of your life. Good luck.
Visit www.danmessina.com for more information.