We often talk about what an owner should do when they want to sell their business. But what about the things they shouldn’t do? There are a number of common pitfalls that owners face during the sale process, and in this article we’ll look at 6 things that hurt the value of a business when it is time to sell.
1. Not Hiring a Professional M&A Advisor
This ranks as one of the biggest issues for an owner, because having a professional M&A advisor can help:
avoid many problems during the sale,
be a seller’s advocate with potential buyers,
evaluate different offers a seller receives, and
help negotiate a more favorable offer.
Many business owners may be tempted to go without an advisor when selling their company, but this could be costly for the business. Specifically, an advisor can help business owners identify things that need to be cleaned up within the business before a sale, determine a range of market values for the business and develop a professional marketing strategy designed to showcase the best parts of the company. A professional advisor will have a broad range of contacts and will help to identify one or more potential buyers. While many business owners are very successful in running their own companies, they typically don’t have the experience it takes to sell their own companies. An advisor can do the heavy lifting during the sales process leaving the business owner free to focus on running the company. A mergers and acquisition advisor who brings strong experience with sales process, deal terms and deal structure will bring significant value to the deal.
2. Lack Of Preparation
Another major issue for owners is being unprepared for a sale. There are many aspects to getting ready to sell a business:
Are the company’s financial records in line?
What are the goals for the sale?
Who is the ideal buyer?
Are there outstanding fiscal or legal issues to be corrected?
What does the owner want to do after a sale?
These are only a few of the things that an owner has to plan for when preparing for a sale. Not having a complete and proper plan in place can lead to a variety of issues during and after a sale. If the owner or business isn’t properly prepared, this may translate into a lower sales price or failure to meet the seller’s goals. This is a problem that having an advisor can help solve, but the owner should also carefully consider their plan before beginning the sale process.
3. Not Maintaining Confidentiality
Generally, it is wise to maintain complete confidentiality while attempting to sell a business. If the word get out about a sale, there can be severe consequences for the business or business owner. First, staff morale may go down because of the uncertainty of what’s happening to the business, and the company may lose key employees. Second, customers who find out about a possible sale may cease to do business with the company if they sense a change in ownership. If customers have a good rapport with the current company leadership, they may be unwilling to do business with the future owner. This could cause revenue to fall, which could hurt the company’s value. Third, competitors who find out about a potential sale may use this as a way to entice clients to move to the competitor if the client is concerned that a new owner cannot fulfill the current owner’s obligations. Maintaining strict confidentiality is extremely important during the sale period. It is important to ensure that all parties involved are bound to some form of non-disclosure agreement to ensure that word of the sale doesn’t become public knowledge. An M&A advisor can assist with this by making sure each buyer adheres to a properly written nondisclosure agreement.
4. Not Understanding the Business’ Value
Owners should always strive to ensure that they have a proper idea of exactly how much their business is worth before they attempt to sell their company. An improper valuation can hurt the sale value in a number of ways. If the owner’s expectations for a sale price is too high, buyers will likely not be willing to pay the asking price for the company. Overall, business owners should be sure to carefully evaluate their company to get the correct sale price based on their company’s value. M&A advisors know the correct ways to evaluate a company’s value, and hiring one can ensure you get a price that will be attractive to potential buyers.
5. Spending Time on the Wrong Buyers
Many buyers who express interest may have little to no intention, or ability, to buy the company. They may be trying to get information about the company’s finances or operations. They could also be coming in with the expectation that the current owner will partially or completely finance the business after the sale. They also might be indecisive and string the owner along by going back and forth on their thoughts about buying. All these types of buyers represent distractions for current ownership during a sale. If the owners entertain uninterested or unqualified buyers, they may find a lot of time and energy wasted. It’s important to vet buyers to ensure that only the most qualified are considered. Advisors are adept at spotting good buyers, and can ensure that the owner will quickly receive a shortlist of qualified buyers for the company.
6. Misrepresenting the Business
The final pitfall to avoid is misrepresenting the business during a sale. Whether intentional or not, this can lead to potential legal problems after the sale of the business. To avoid this, owners should ensure that they accurately report their finances, and the company’s value. This gives buyers the correct idea of the company’s value before a sale. It’s also important to resolve any outstanding legal issues and and that these and past issues are properly disclosed to the buyers. Failure to take these steps represents serious future risks. M&A advisors play a key role to make sure all relevant points are covered, and that the business is presented in the best light without misrepresenting any aspect of it.
Take Aways
A business owner can greatly benefit from a sale of the business, but there are also potential risks in a sale. If these risks are not properly addressed, this could negatively impact the company’s value upon a sale or could lead to legal issues post-closing. It is recommended to work with an experienced mergers and acquisitions advisor on your team, to help you avoid these issues and maximize your company’s value.