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Common pitfalls and mistakes when selling a business

Common pitfalls and mistakes when selling a business

Years dedicated to building up a business culminating in one final sale - your chance to cash in on all the time, effort, expertise, late nights, good fortune, and everything else poured into creating the entity you have today.

Yet a majority of businesses put up for sale never find a buyer. And when they do, sellers typically walk away with a smaller payout than they’d expected. It’s a complicated process littered with potential pitfalls. Here are the more common mistakes to try to avoid.

Not planning in advance

The best time to sell is when the going is good. Businesses command more value when they have upwards momentum. Don’t wait until fortunes have plateaued or are declining, or worse, when you’re finally out of passion and drive and need a hasty exit.

It’s a also a common mistake to begin preparing after the sale process has started. Optimising your business for sale can take years.

For example, one of the biggest barriers to sale is an owner or management team that is too essential to the operation (how, then, can the buyer succeed once you’ve left?). This needs to be rectified before going to market.

It’s also important to ensure debtors and creditors are as close to normal terms as possible, an unnecessary lock up of cash in working capital can affect the price. Ensure that all information required during a due diligence process is up to date and readily available. Have answers ready for obvious questions that will be asked.

It may also take some time to get all shareholders to agree on everything from your need to sell to the target price. Too many deals stall because the sellers can’t agree among themselves.

Going public too soon

A business that’s up for sale is a business with an uncertain future. Wherever possible, it’s best to conduct the first stages of a sale in private. Otherwise it can cause instability among staff worried about their jobs, as well as customers and suppliers concerned about your longevity, and suddenly the business can begin to unravel before the sale completes.

Pricing too low, or too high

Price is a tricky, highly emotive issue. Many inexperienced sellers set a price too low, missing out on a higher payout. But just as common, owners overestimate their organisation’s worth. This can result in a lack of enquiries, and the need to eventually settle for a lower price than planned for.

Beyond this, many business owners fail to take into account the cost of a sale. While they may achieve the price they’d hoped, by the time taxes and fees are deducted, they’re left with a lot less than expected. Work with your advisor to ensure you set a reasonable sale price and extract your money efficiently.

Not pre-qualifying buyers

Nosy parkers, tyre kickers, time wasters. It’s inevitable that you’re going to attract them, the pitfall is to entertain them. It’s going to be time-consuming process putting on your presentation and answering questions, so ensure you’re limiting your audience to genuinely interested parties with a screening process. Asking for proof of finances and insisting on a confidentiality agreement is usually enough.

Ignoring the after-sale particulars

It can often be advantageous to let a buyer pay in installments if this helps them finance a deal. Just make sure your terms are iron-clad.

Don’t allow the buyer to dictate that future payments are contingent on the company’s future performance - especially if you’re no longer involved and it’s entirely out of your control.

Any agreement to help the business after the sale should be formalised. It’s ok to work a handover period, it’s not ok to enter into your next venture or retirement while still at the beck and call of your old organisation’s new owners.

Doing it all yourself

Many of these mistakes occur simply from inexperienced business owners attempting to shoulder the burden themselves.

Settling on the wrong price, bumbling through the sale process and being negotiated down, or ignoring the tax aspect and taking home a smaller portion than you’d expected can all be wildly expensive mistakes.

Further, selling a business is a hugely time-intensive process. Trying to juggle it with your existing daily duties can cause you to do one - or both - well below standard.

Speak to our team to find out how our experienced advisors who can help prepare your business for sale, walk you through the process and ensure you exit with the payout you were hoping for.

Martin Kennedy

About the author

Martin Kennedy

Director

Meet our Team of Experts

Martin has nearly 20 years’ corporate finance experience specialising in advising owner managed businesses. Martin has considerable experience advising on business sales as well as management buy-outs and acquisitions across a wide range of sectors and deal sizes.

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