4
Common Mistakes Business Sellers Make
1.)
Basing The Asking Price On The Wrong Things - In my opinion,
pricing the business incorrectly is the most common mistake
sellers make. When you sell a business, there are a variety
of methods you can use to value your company and determine
an asking price. Exactly how you determine your asking price
will depend on your particular situation. But in any case,
your asking price needs to be a number you can support with
facts: the actual past performance of the business and
justifiable projections about it's future.
Unfortunately,
many owners set themselves up for disappointment by
committing one or more of the following mistakes when they
sell:
** They set the asking price based on how much they need to
pay off debts (Or how much they need to retire comfortably)instead
of basing the price on the business' performance.
** They base the price on what they heard another,
similar business sold for (I see this done most often by people
selling an Internet business).
** The
base the price on a"rule of thumb" that has no basis
in reality. Many industries do have a "rule of thumb"
that can help you get an idea of what "neighborhood"
your asking price should be in, but they are usually much
more conservative than what I see most sellers
use.
** They
base the price not on what the business has actually done,
but on what it could do if the buyer did a whole host of things
the seller never bothered to do. Here's an example of this
type of thinking taken from an actual restaurant for sale
ad submitted here at TheBizSeller.com:
"A
new owner could explode profits by adding new items to the
menu and staying open throughout the dinner hour (we currently
are open just for breakfast and lunch). Also, there are a
number of marketing and advertising opportunities a new owner
could capitalize on to take this business to a whole new level."
A
buyer would certainly be justified in asking this seller,
if these changes are so easy and certain to be profitable,
why hasn't the seller already made them.
A
detailed discussion of valuation is beyond the scope of this
article, but in short, your asking price needs to be determined
by the historical performance of the business.
Potential
and opportunities for growth are important and should be used
to motivate a buyer (and to make you stand out compared
to all the other businesses that are for sale) but you
don't expect to get paid today for the work (and the risk)
the buyer is going to take on in the future.
2.)
Failing To Disclose Important Facts About The Business -
Many sellers of successful businesses have killed a possible
sale because they were afraid to disclose to the buyer the
complete truth about the business.
Some
problems your business are facing may in fact turn off some
buyers, but other buyers may be completely unfazed.
Buyers
assume that every company has some problems and will
distrust any attempt on your part to present a completely
perfect business. You will be better off if you mention up
front any issues you are facing along with steps you are taking
- or that can be taken - to turn things around.
Common
issues that businesses face that may turn off a buyer are:
•
One customer accounts for a too large portion of the company's
sales/profits. What
is "too large' will vary from on industry to the next
but certainly if one customer accounts for more than 20%
of your sales that will be viewed as a red flag by most buyers.
• The
business has unpaid taxes
• The
lease is due to expire in the near future
• Sales have trended down in recent years
• Major
investment will be needed to get the business up to code regarding
environmental and/or safety standards
Whatever
challenges your business is facing, the buyer will find
out about them sooner or later. As stated above, a buyer
will expect to find a few problems, so there is no reason
why you can't sell your business just because it has a few
negatives. Some buyers may actually be attracted to the challenge
of turning around declining sales or shrinking market share.
In
my opinion, there is no problem that is facing your business
that will kill a sale more quickly than the lose of
trust you will experience when the buyer uncovers something
you were trying to hide.
3.)
Letting Professional Advisers Kill The Deal -
Accountants
and lawyers for both sides may view their role as one where
they must beat the other side. Sometimes
a lawyer will go looking for problems he can nitpick - let
your lawyer know that you want the deal to get done and that
he should work with the other side to find solutions
to any issues that arise. Never
forget that it is your business and your advisors work for
you
4.)
Failing To Run The Business As Usual Once It Is For Sale -
Be aware that selling a business can take 6 months to a year
- even a very simple and successful business will take months,
not weeks to sell. It's important that you continue to
run the business as usual while you go through the selling
process.
If
you get lazy with collecting your accounts receivable or maintaining
your inventory, your business may not be as attractive 6 months
down the road when you find the perfect buyer.
Also,
your customers and employees will definitely notice, if all
of a sudden, you lose interest in the business
or stop paying attention to details.
So,
even after you have decided to sell, continue to run your
business as if you were going to own it forever - if you are
like many sellers you will wind up owning it a little longer
than you had originally planned.
5.)
Spending Too Much Time With People Who Can't Or Won't Buy
- This is such a deadly sin that it should actuall be
listed first. But since I've already devoted an entire article
to just this mistake I won't say any more about it here. If
you already read about this mistake go here to read about
the truth about small
business buyers
Special
Note For Franchise Businesses
- Some sales fall thorough because the business for sale is
a franchise and the seller did not research all the limitations
and requirements associated with transferring the business.
If you want to sell a franchised business, review your Franchise
Agreement now for any restrictions and clauses that
pertain to the sale of the business. It may be worth your
while to hire an attorney who specializes in franchise
law, as these types of transactions are often much more complicated
than non-franchise business sales.
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Step
1 - Preparing Your Business For Sale
