BLOG - Top 10 common mistakes when selling a business
Friday, 13 April 2018
1. Dealing with only one buyer
It’s not unusual for buyers to identify specific sellers and make offers. This is known as an off-market approach. It is often flattering for a seller, who may have not been thinking about a sale but is intrigued to explore it further. Often the offer being made is genuinely competitive, but on occasions it can simply be disguised bargain hunting. Always consult a professional advisor on the proposed deal, and if in doubt and you do truly want to sell, consider taking your business to market and generating some competitive tension. At least that way you’ll be able to sleep easy after the deal knowing you got the best possible price.
2. Allowing profits to fall during the process
It’s surprising how many times we see the performance of a business fall immediately after a sale has been agreed in principle. Whether it’s simply bad luck, distractions from the negotiation phase of the sale process or dreams of white sandy beaches, business owners often take their eye off the ball in the vital weeks and months leading into the completion of a sale. This gives the buyer and their advisors the perfect excuse to demand a price reduction (known as price chipping). So, we always advise sellers to redouble their efforts to keep their business firmly on track.
3. Not having up to date management information to hand
For the reasons above, buyers want to know how the business is performing leading into the sale. They can’t be expected to rely on the last set of annual accounts which could be many months out of date. Being on top of your management accounts shows good business housekeeping. If things are going well, it also gives you ammunition in negotiations to seek a price increase or at least defend any proposed price chips from your buyer.
4. Knowing too much about the business
Buyers will expect you to be knowledgeable about your business, particularly on strategic matters, but alarm bells will start ringing if you can answer every operational query they fire at you without consulting other team members. It suggests your day-to-day involvement is too great and, when you eventually leave, the business won’t be able to function as well as it currently does.
5. Saying too much
Experienced buyers and their advisors will turn on the charm, ask lots of open questions and leave plenty of time for you to answer. This tactic can result in sellers volunteering all sorts of information about the business in an effort to fill uncomfortable silences in conversation. Answer their questions honestly and directly, but stop there.
6. Not being committed to a sale
Nothing turns a buyer off more than the prospect of investing lots of time and money into a potential business purchase, only to find the seller pulls out and was never really fully committed to it in the first place. Buyers will seek reassurance from you right from the outset. If you’re not truly committed, wait, and take your business to market when you are.
7. Not doing your own due diligence on the buyer
A good advisor will do this for you, but it is important to check your buyer has access to sufficient funds to back up their offer. Not only that, but what board approval is needed and has their interest to date been officially sanctioned? It’s also worth checking to see what other business purchases the buyer has made in recent years, and if possible speaking to these sellers to find out their personal experiences of dealing with the buyer both during and after the sale process.
8. Unrealistic price expectations
In my experience, many business owners feel their business is worth more than it actually is, often citing all of the potential upside of the business that hasn’t yet been fulfilled. Sometimes the difference in perceived value is minimal, sometimes it’s enormous! I suggest turning it on its head. Pretend you’re buying your own business. How much would you genuinely offer?
9. Skeletons in the closet
Most businesses will have a few issues of concern for a buyer, such as outstanding customer debts, employee handling, obsolete stock, environmental issues and regulatory compliance. It’s important that these issues are identified and resolved early in the process. Don’t think you can bury them, a buyer may pick them up in due diligence, and if they don’t they will ask you to make promises in the legal contracts that no such issues exist. If you don’t disclose these issues a buyer may be able to come after you for financial compensation after the deal has completed.
10. Not using professional advisors, or leaving it too late
I’m sure it comes as no surprise that I recommend using a professional advisor for the sale of your business but it truly does make sense to do so. You may only sell a business once in your lifetime, whereas professional advisors advise on these matters every day. For such an important transaction why wouldn’t you want to benefit from the expert advice they can provide to maximise your business value and avoid potential pitfalls? Indeed, the chances are that your buyer will be taking professional advice so you run the risk of being heavily outmaneuvered in structuring your deal. And don’t leave it too late either, if you agree a deal in principle only to find it then needs to materially change it can be hard to back-track and salvage the deal.
If you’d like to explore the potential sale of your business, please get in touch.
Call 0330 024 0888 or email email@example.com
Next month: Top 10 reasons to be wary of business brokers