Common Mistakes to Avoid When Selling a Business
Company Value Is Based on the Future
The things that make a business owner successful when launching and building a business - healthy ego, self-confidence, strong will and keeping their own counsel - can be his or her downfall when selling the business. We find that these arguably healthy characteristics lead a business owner to make some common mistakes when the time comes to sell the business.
Most owners don't know how to value their businesses because they often focus too much on past performance. Value is based on the future, a future in the hands of a buyer. Value increases when it is based on how someone else can leverage a business as part of a bigger, better, more profitable enterprise.
A major component of today's business value lies in the intangibles. Business owners rarely know what those intangibles are and even more rarely what they are worth. The market, however, does. The way to let the market determine the value is by involving more than one buyer.
Disclosing Price May Be A Mistake
Meanwhile, it is a huge mistake for an owner to ever state a price. That price could become a ceiling. Savvy buyers will respond favorably to whatever price is stated and from there the temptation begins.
As intermediaries, we never state or set a price; we let the market speak.
This is an easy mistake to make because it is counterintuitive: the more people who know a business is for sale, the less the business is worth. If employees find out, they will become insecure. Morale is hurt and resumes start circulating. If competitors find out, they will make offers to the best employees. And, if word spreads in the marketplace, the business can become "shopworn." Everyone wonders why no one has acquired this business, and all the positives about the business are soon forgotten.
Negotiating With Only One Buyer
A business owner's instinct will be to find, or respond to an inquiry from, a potential buyer and proceed with that single suitor. Experience in observing business sales where only one buyer was present has led us to believe these transactions average as much as 35 percent below market value.
Unfortunately, these sellers never knew how much they left on the table.
Generating competition among buyers for the business is the only way to determine true market value. Different buyers with different motivations for owning the business will set different values on it. This is the key to deriving ultimate value from the business.
We often say that the 90-day period during which we negotiate multiple offers are the most prosperous days in the life of a business.
Tempting To Sell To Competitors
The first potential buyers that often come to mind are competitors, yet they are the usually the worst buyers. Talking to competitors brings the highest risk of a breach of confidentiality and misuse of company secrets. In the end, when competitors have full knowledge of your business, they are likely to make offers that are significantly less than those of buyers that are not competitors.
Other types of buyers that are often pursued are key employees, customers and suppliers. In all cases, there is high risk regarding confidentiality. Moreover, these offer little or no synergy and, as a result, lead to low prices.
Information should be provided at the proper time to impact value. Information provided to elicit a letter of intent should present the strongest- honest - picture of the business. Only after a letter of intent has been accepted should an owner provide tax returns, detailed financial statements, leases, margins and suppliers. On several occasions, we have not provided customer lists until all elements of the definitive sale agreement have been established and all other agreements reached.
Negotiating On Your Own Behalf
Owners are used to negotiating and think they can negotiate their own sale. But the business represents a lifetime of effort and that evokes tremendous emotions and sensitive issues. Irrational handling of issues that come up during a sale can cause failure.
It's better to have an outside negotiator, in part to keep emotions out of the picture and to follow key rules of negotiating. A merger and acquisition professional can be an effective negotiator. They can provide the firewall to buy time to think through issues because he or she cannot commit on the higher authority's behalf.
Business owners tend to be flattered by an approach. Pictures of freedom and wealth dance in their heads. They get curious. Curiosity leads to dangerous dabbling. An owner should never try to get an offer until absolutely certain he or she wants to sell. Getting to an offer raises risks of confidentiality and becoming "shopworn." In addition, it can take a tremendous effort determining how to respond and what information to provide. In the end it can take an emotional toll.
Don't go there to see what happens; go there because you mean it.
Professionals Smooth Process
The process of selling a business is no less intricate than surgery. And while a skilled surgeon can make it seem simple, you don't want to do it on yourself.
Professionals help an owner level the playing field. Buyers almost always have more experience than sellers. Professionals can bring multiple buyers to the table; owners have a tough time doing that. Professionals can assure confidentiality in approaching buyers, which an owner absolutely cannot. Professionals can move the process along faster, solve problems and structure a transaction to meet the seller's needs.