2/15/2013
10 Mistakes To Avoid When Selling Your Business: An Insider's Guide
There comes a time for every business when ownership changes, whether through a transition to the next generation or an outright sale to a first time or an experienced buyer.
By Art Blumenthal
The majority of challenges and frustrations experienced by sellers can
be avoided with solid information about the pitfalls of selling a
business in today’s market. While there are dozens of challenges to
overcome, here are the first five of 10 of the most common mistakes that
can have drastic repercussions and cause both stress and loss of value
on a business sale.
This insider’s guide will provide insight for navigating the
complexities of a successful selling transaction. Follow these tips to
maximize the success of your sale and preserve your peace of mind.
You probably don’t expect the exit from your business to be easy, but
without step-by-step guidance, most sellers are surprised by how
difficult and frustrating it can be to sell their company for a good
price in a reasonable timeframe, especially in the current economic
environment.
Mistake 1 … Failure to Prepare and Properly Package Your Business
If you were selling your house, you would obviously spruce it up before hanging a “For Sale” sign in the front yard.
Selling a business with confidentiality means you can’t advertise it by
name or put up a sign, so it’s even more important to address several
key aspects of your business before it is marketed.
Selling a business with confidentiality also means it is wise to
consider utilizing the services of a qualified business broker who
possesses the experience and training to maintain that confidentiality.
Yes, sprucing up your physical facility will give a prospective buyer a
good impression when touring your building; however, the financial
condition of your business and the state of your records and
documentation is most important in accurately presenting your business
in the best possible light to attract qualified buyer prospects.
Before your business can be marketed, a comprehensive Confidential
Business Review (CBR) is prepared to educate prospective buyers on your
business and the industry. A professionally prepared CBR will include
information from the sources in the chart at left, so you will want to
have this information readily available to provide to your broker.
A word about financials and tax returns...
Most business owners, and their accountants, do their best to minimize
taxes, not maximize profits. Remember that buyers are buying your cash
flow more than anything else. While there are a variety of sophisticated
methods of valuing a business, the bottom line is that the sales price
of the business will likely translate to a multiple of the cash flow —
so everything that can be done to present your business with the highest
cash flow will directly result in a higher sale price.
One of the biggest mistakes that a seller can make is leaving
dollars on the table through an improper “recasting” of the financials
that does not maximize the cash flow. A broker who has
industry-specific experience will have seen dozens of financial
statements for automotive businesses and, therefore, will know exactly
which expenses to question as higher than industry norms.
Mistake 2 … Failure to Properly Price the Business
Wouldn’t you rather reap the rewards of selling your automotive business
for the highest cash price, than leave money on the table?
Overpricing or underpricing a business is a common mistake. It’s fine to
be confident that you can successfully sell your business at a good
price, but far too many business owners go into the selling process
thinking that they will get top dollar simply because they believe
that’s what it’s worth.
True value is based on quantifiable criteria, not the seller’s emotional
appraisal. One way to gauge your perspective on reality is to ask
yourself if you would purchase another dealer’s business with the same
sales and profits at that valuation.
Conversely, it’s also a mistake to state a price before knowing the full
potential value of your business. Don’t sell yourself short by setting a
price too quickly, even if you are burned out and highly motivated to
retire, downsize or pursue other business interests. Remember, you can
always come down, but it’s more difficult to raise your price once the
marketing process begins.
If you are willing to consider seller financing, then one strategy to
consider is a dual-pricing option, where you advertise both an “asking
price” based on seller financing and a lower price for an all-cash deal.
Once you and your broker have carefully analyzed your financials and
identified an appropriate asking price for your business, you will have
learned a valuable lesson in how buyers will evaluate your business and
calculate their own price to offer you.
You will know that for every dollar of cash flow increase that you can
generate, you may get $2 to $3 more in a sales price. It typically takes
4-12 months of marketing to sell a business, so use this time to
brainstorm how to raise sales levels or focus on expense levels that are
above industry norms.
Mistake 3 … Failure to Sell Your Business Before You Need to Sell Your Business
Few
business owners are lucky enough to sell their business at the perfect
time. Too many owners wait until the last minute to decide to sell their
business. They wait until business is down, or they are completely
burned out, or their partnership has soured, or they have an unfortunate
health issue, or perhaps their franchise or lease is close to
expiration.
The time to sell is:
• When business is good;
• When you don’t have to sell; or
• Before the emergency happens.
The best time to sell is not necessarily now either. If your business
has had a couple of down years and you have not yet turned the corner to
positive sales and profit increases, then you can expect to see a
decline in the value of your business and a longer time to find a
qualified buyer. If you can muster the energy to breathe new life and
profits into your business, retrain your people, increase your
advertising and improve your customer service, then waiting to put
your business on the market may be the path to maximizing your sale
price.
Mistake 4 … Failure to Leverage the Right Professionals
You are an expert at running your business. Are you an expert at selling it?
If an accountant, attorney, financial planner or business broker needed
an air conditioning compressor in their car, would it be wise for them
to try to install it themselves if they are not ASE-certified and
properly trained?
There may be cases where the DIY approach works, but for most business
owners, relying on your accountant and attorney, and hiring a business
broker, will not only help your peace of mind, but will likely result in
a higher sales price, than not relying on professional expertise. As
the old saying goes, “The attorney who represents himself has a fool for
a client.”
Select your team carefully. An attorney who specializes in business
transactions is likely to be more cost-effective in preparing closing
documents and reaching agreement with the buyer’s counsel. A broker with
industry experience and a realistic approach to valuation is more
likely to be successful in engaging buyers and getting them excited
about your business.
Tax planning with your accountant is also important in reducing the impact of capital gains tax.
By properly apportioning the price between assets such as goodwill,
equipment and non-compete provisions, it’s possible to make the purchase
price more attractive to your purchaser through immediate tax
allowances, or less onerous to you through tax liability.
Mistake 5 … Failure to Maintain Confidentiality During the Sales Process
Confidentiality is important and needs to be continuously managed. If
word gets out that your business is for sale, it could adversely affect
sales and your relationship with your employees and stakeholders. An
experienced broker knows how to simultaneously market your business and
maintain strict confidentiality.
Buyers are willing to pay more for an operational business than a
start-up because of its customer base, track record of sales and
profits, and trained staff. The vast majority of buyers will want your
employees to stay, but some staff members may become fearful of change
and start looking for another job — or they may demonstrate less
enthusiasm and lose focus on customer service, productivity and shop
appearance. Suppliers may hold back on deals or change credit terms.
Competitors may use the information as a selling tool against you.
All buyer prospects should be signing a Confidentiality Agreement prior
to being given the name and location of the business, or a copy of the
Confidential Business Review document that contains your financials.
Look for Part 2 of this article in the March/April 2013 issue of Shop
Owner where Mistakes 6 through 10 to Avoid When Selling Your Business
will be provided. Or, if you just can’t wait, visit
www.art-blumenthal.com to request a copy of the entire article.
Leveraging more than 30 years of experience as both an aftermarket business owner and aftermarket technology executive, Art Blumenthal LLC provides business intermediary and advisory services to both buyers and sellers of industry businesses of all sizes. Art is a member of IBBA (International Business Brokers Association, Inc.). For more information, or to initiate a no-obligation confidential consultation, visit www.art-blumenthal.com.