7 Mistakes to Avoid When Selling Your Business

7 Mistakes to Avoid When Selling Your Business 

 

Selling a business is rarely easy. Especially in a poor economy, it can be incredibly hard to get a fair price. This can be frustrating for business owners, and, as a result, the process of trying to sell their business can become an excruciating one.  

 

However, a lot of this frustration can be reduced if you recognize some common mistakes that owners make while selling their business. Here are seven common mistakes to avoid when it comes time to sell your business. 

 

 

Insufficient Preparation 

In the same way that you might give your house a facelift before putting it up for sale, your business will benefit from a little TLC and cleanup before you go out into the market to sell it. Take a look at all the things that need to be fixed. Some common areas to look at include: 

 

  • Excessive or questionable tax deductions, including running too many discretionary, personal expenses through the company — even if the deductions are legitimate, they lower the earnings of the business and require explanation, so consider scaling back on them in anticipation of a sale 
  • Pending or threatening litigation — you may not be able to resolve everything, although take steps to resolve all the matters that you can feasibly resolve. You may still have to disclose the prior litigation, although buyers tend to give too much weight to risks and the more you can take off the table (resolve, so they do not have to), the better off you will be. 
  • Organization of books and records — a buyer of your company is going to conduct due diligence. Due diligence is the M&A (mergers & acquisitions) term for looking under the hood and kicking the tires of a company before acquiring it. A buyer and their legal and financial advisors will want to review all your contracts and governance records (such as minutes of the meetings of the board of directors and shareholders of a corporation or minutes of meetings and actions by written consent of the members and managers of an LLC). Have these documents collected, complete, well-organized and ready to go. 
  • Staffing considerations – be sure you have the right people in the right jobs being paid the right amounts (not much more or less than market rate for salaries and bonuses of employees in similar positions in your industry). If you aren’t planning to stick around after you sell the company, be sure the business can operate without you, that your employees know how to run the company.  

 

It’s not possible to fix everything at once. A better idea is to start the preparation process long before listing your business for sale. This way you will have plenty of time to address the items that need to be addressed. 

 

 

Unwillingness to Hire Professional M&A Advisors 

You may have built your business because there is nothing you won’t or can’t do. However, if you grew the business to a significant size ($5 million+), you certainly realized along the way that you need other people to help (and, even if your business is smaller, I hope you recognize this fact!). Even if you can do everything, there are some things other people can do better and your time is limited. It’s just not possible to grow beyond a certain point without a good team. 

 

When you are selling your company, it’s similar situation, especially if your company is worth anything more than a few hundred thousand dollars. For very small businesses, the DIY approach may get the job done and you don’t have a lot of budget for experts. I understand that, just be cautious. And, with companies in the upper main street range and beyond, don’t be, as my mom used to say, “penny-wise and pound-foolish.” 

 

While you may be an expert at running your business, you probably aren’t an expert at selling it. It’s always good to get a broker involved to get a good price for your business. Yes, not hiring a broker will save you the 10% or so (maybe a little more for very small businesses and less for companies selling in the million dollars+ range) you’ll pay them, but hiring them could easily increase the price and it will almost certainly increase the ease and likelihood of getting the sale closed. 

 

Investment bankers perform a similar job as business brokers, although they also traditionally have licenses to market and sell securities and help companies raise capital and sell equity. Both business brokers and investment bankers will be responsible for preparing documents presenting your company in the best light, identifying buyers, listing the company in the right databases, generating interest, soliciting offers, accepting one and shepherding the deal to closing. 

 

Transactional lawyers (also called corporate lawyers) help with the due diligence (organizing and managing it if you are the seller) and preparing and negotiating the asset purchase agreement or stock purchase agreement, and all the ancillary documents, such as bills of sale, promissory notes, secretary and officer certificates and resolutions and meeting minutes of directors, shareholders, members and managers. You can grab a document from Rocket Lawyer or use a simple form from your broker. If the sale goes perfectly, that may turn out to be a good move and save you a couple shekels. If there are any issues or questions later (businesses aren’t sold “as-is, buyer beware,” like couches), you will benefit from the custom services of an experienced M&A attorney. 

 

Accountants and financial consultants can play an invaluable role in helping you structure your deal and think about the tax consequences. Businesses appraisers can give you a great estimate of the value of your company, although many brokers and investment bankers will do this, as well. 

  

The key is to choose advisors wisely and in the overall context of the size and complexity of the transaction. If you haven’t been through this process before, it’s a huge help to have a trusted advisor who has and has broad perspective on what’s going and who does what. Lawyers with finance and business experience are helpful in that role. A CPA who spent 10 years in law may help. A board advisor who sold their company for $50MM and had great advisors along the way and during the process probably understands the nuances of this process well enough to help you decide what types of advisors you need, what types you don’t and how to choose the right ones. Ask for help from someone you trust with good perspective and experience. 

 

When it comes to engaging professionals, perform you own due diligence. Ask about experience and, if there is any doubt, get references. Great professionals will make the process much easier and protect you along the way. 

 

Disengaging from the Business Sale Process 

After you have hired a broker or investment banker, don’t get completely disengage from the process. Many sellers make this mistake, thinking that the broker alone will be enough to handle the M&A process. Always remember, that no one has the same level of motivation to sell your business as you do. Yes, the broker will bring in some qualified prospects, but it’s your job to turn those prospects into buyers by instilling confidence in them that they can run and manage your business with your guidance. 

 

Also, always remember that the deal is not done until it is signed and closed. I represented a buyer of a professional services organization years ago. The business they were buying was run by two owners that were active in the business. As the deal went along, the owners became less and less active. While it was good that the business could still run without them, it sent the wrong message to my client, the purchaser, and the employees of the selling company. My client was worried the owners wouldn’t be involved at all after closing and the deal required them to consult with us and remain involved. The seller’s employees got the feeling that the owners only carried about unloading the company and they felt quickly abandoned. If the owners were more accessible and communicated more along the way, they could have easily handled both sets of concerns. 

 

As we were getting closer to closing, an issue arose about a certain company permit. We couldn’t reach either owner for nearly a day and a half. This wasn’t on the weekend. This was in the middle of the week on a deal headed to the closing table soon. That was frustrating and my client bailed on the deal, cancelling the asset purchase agreement. My client ended up buying another company. I heard later that the owners were able to pull things together, but only after struggling for many months to regain the trust of their employees after the deal was cancelled. I know they didn’t sell at that point in time.

 

Finish strong, stay engaged. A buyer will be inclined to think you don’t care about the deal or the business if you are noticeably disengaged. Remember, the buyer doesn’t know that you spent 80 hours a week for years building your company. They only see what they see during the M&A sale process and, if you appear to not care, they may question how tight a ship you ran along the way. Show you care, stay engaged, finish the job strong and get the deal done. 

 

 

Misrepresenting Something About Your Company to the Buyer 

As a business owner, it’s your responsibility to present your business to the buyer in the best way possible. But never misrepresent your business to a prospective acquirer in an attempt to sell it. If you exaggerate numbers before the sale, it can cause you serious trouble once the buyer finds out after your business is sold.  

Don’t hide any prior investigations or litigation. That doesn’t mean you put these issues front and center in your sale documents. Talk to your advisors about when to bring up these issues. But, don’t wait for a prospective buyer to uncover them during due diligence if they are major concerns. Get in front of the issues and explain them. 

 

Your purchase and sale agreement will contain lots of representations and warranties, which are your promises to the buyer of your business about certain things. Some common reps & warranties deal with: 

  • The proper formation of your company (e.g., incorporation) and its good standing in the state where it was formed 
  • Capitalization – who owns the company 
  • Litigation – there is none (or reference will be made to a seller’s disclosure schedule that lists the relevant matters) 
  • The company has paid all taxes due 
  • There is no pending or threatened employee grievances or strikes 
  • The financial statements and books and records you provided to the buyer are accurate 

 

The reps & warranties are written in a legal contract. Your M&A lawyer should write them in understandable language (plain English” as much as possible), although sometimes it’s tough to make the language highly readable to non-lawyers while still capturing everything that needs to be addressed legally. Be sure to ask what everything means. If you can’t understand it, it needs to be rewritten so you and the buyer can fully understand it. Again, it may not read like a comforting bedtime story, although you need to know what is being communicated and to be certain you can make every representation and warranty without exposing yourself to undue risk. 

 

 

Not Considering the Structure of Your Business Sale 

Many owners are excited to get an offer to sell their business. They don’t spend a lot of time thinking about how to structure the sale. There are three basic ways to sell your business – selling the assets with an asset purchase agreement; selling the stock or other equity interests (including limited liability company or partnership interests) or through a merger.  

 

Although the acronym, M&A, stands for mergers and acquisitions, mergers are not very common with smaller private companies, especially what we call main street businesses, which are businesses that sell for under $2 million. Most sales of main street business are completed as asset sales. Mergers tend to happen with larger, more complex companies where transferring a lot of assets is laborious and the tax implications of the structure are enormous. A merger is a clean way to transfer a company, although structuring a complex merger requires sophisticated M&A advisors. Therefore, in the market where I operate, most deals happen as asset sales and some percentage in-between (asset sales and mergers) are completed as stock sales. 

 

Asset sales tend to be good for buyers, whereas stock sales favor sellers. The reason sellers prefer stock sales is because the liabilities of the business go along with the stock, but purchasers can choose not to assume liabilities in an asset sale (this is broad information and subject to exceptions. In a stock sale, a seller may enjoy capital gains tax on the sale of the stock, which doesn’t hurt the buyer per se, although buyers like asset sales because they can mark up the value of the assets on their books following the closing. There are other issues to consider when deciding between an asset sale and stock sale, including issues around transferring contracts, licenses and certain assets that have registered titles. Asset sales presents greater challenges around transferring these items. Technically, in a stock sale, they aren’t transferred at all. Only the stock changes hands from the seller to the buyer (i.e., the assets and contracts all stay in place, still owned directly by the company whose stock is transferred). 

 

A great business broker or investment banker can provide tremendous assistance selling your business, although they may not always be helpful in structuring the transaction. Business brokers are often not licensed to deal in securities and may not want to encourage a stock sale. Investment bankers often are licensed and have less concerns here. This depends on many factors, including state requirements, what’s custom in your market and the licenses held (or not held) by your advisor. Corporate (also called transactional) lawyers can advise you regarding the structure of the deal and, when it comes to complex tax issues, a CPA or tax lawyer may be just what you need. 

 

 

Problems Valuing Your Business for Sale 

Setting a price without undergoing the valuation process can cause your sale to be slow. If your price is too low, potential buyers might think that there’s something wrong with the business. However, an extremely high price is obviously going to repel buyers. So, for a smooth sale, it’s a good idea to conduct a thoughtful valuation of your business before putting it in the marketplace. 

 

If you hire a business broker or investment banker, they will perform the valuation. If you are going it alone, selling without the help of a broker or banker, engage a qualified business appraiser before you list the business for sale. 

The valuation provided by your advisor will usually be a range (e.g., $1.8 million to $2.1 million). And, it’s their best estimate of value. Ultimately, your business is worth what a buyer will pay. Valuation is part science, more art. You will typically ask for a price that’s toward the higher end of the scale. Negotiating the sale price is where brokers and bankers earn their money. If they’re involved, let them do their thing and earn their fee. If they aren’t, if it’s just you, know how to defend the price you are asking. 

 

 

Paying Too Little Attention to Confidentiality Considerations 

It’s a good idea to not advertise to the general public that your business is for sale. This can affect your sales if customers get concerned that you won’t be around to service their accounts in the future. If your deal doesn’t go through for whatever reason, customers and vendors may unfairly label your business as “damaged goods” – a business no one wants to buy. This may be ridiculous. It may happen even when you, the seller, decide not to sell the business. While you can’t control this issue 100%, at some point word may get out that your company is for sale (especially if you intend to approach other companies in your industry as potential buyers), be intentional about how you control that message.  

 

A good broker will always market your business with discretion. They will not identify the name of your business or give any other key details that might allow people searching the online business listings to recognize your business. A careful broker (or banker) will only provide identifying information once they have done some basic qualifying of a prospective purchaser and obtained a signed non-disclosure agreement from the purchaser. If you are selling your business yourself, be sure to take similar precautions.  

 

Selling your business can be tricky. But if you follow all the advice tips above for selling your business and avoid these 7 mistakes, you’ll be able to make a sale happen for the right price and on the right terms. If you have any questions about this article or want to talk about selling your business with me (mainly from a legal perspective, although I have plenty of experience on the business side of M&A), give me a call at 512.888.9860. Best success! 

Find More Resources

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Letter of Intent

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