Selling a business isn’t easy. Everything about the process, from valuation to finding the right buyer, is fraught with potential pitfalls.
Business owners are incentivized to sell their business for as much as possible, as quickly as possible. These incentives, however, can lead to disastrous mistakes. Mistakes that can land the business owner in financial trouble – and legal hot water.
The tips we’re offering here can help business owners save time and money. Let’s jump right in.
Don’t try to do Everything Alone
This is the most crucial mistake small business owners may be inclined to make – and by avoiding it, they may be able to circumvent all of the other mistakes we’ll describe below.
Selling a business is a tremendous undertaking. As such, the seller will do well to ensure they have a capable team assisting their efforts. A business broker is only the start. Sellers will need transactional lawyers, accountants, and financial consultants to get the most out of the sale.
Hiring these consultants – sometimes referred to as mergers and acquisitions (M&A) consultants – will cost a fair chunk of change. In the end, however, sellers will typically make more money than they’ll spend when using consultants.
These consultants will help business owners avoid legal pitfalls, ensure that the buyer is found with discretion, help determine the value of the business, and a whole lot more. Most of the rest of the mistakes we discuss in this piece can be avoided through the judicious use of M&A consultants.
Don’t Misrepresent the Business
“Don’t lie when selling a business” is a piece of advice so obvious, a seller might not think about it any further.
Misrepresentation, however, goes beyond simple lying. Any omission of material fact can be considered misrepresentation, and the onus is on the seller to ensure the buyer is properly informed.
A seller might, for example, feel that it’s reasonable to omit a pending lawsuit (or even a recently completed lawsuit) from the documentation about their business. A buyer doing their due diligence would then discover the lawsuit – and suddenly, it looks a lot like the seller has something to hide.
That’s one of the reasons that it’s essential for business owners to enlist a team of M&A consultants before selling – they can help the seller avoid accidental misrepresentation.
Don’t tell Everyone About the Sale
A business owner may be seen as the most valuable asset of the business. This is especially true when the business owner operates most of the business on their own or has very close relationships with vendors and/or customers.
Should the sale of the business become public knowledge, these relationships can quickly vanish, as vendors and clients may worry that operations will change significantly under new ownership. As such, sellers should be wary about who they advise about the sale of their business.
A good business broker can help here – they’ll be able to list the business without disclosing the business name or other identifying information. Once a prospective buyer has been found, they’ll get them to sign a non-disclosure agreement (NDA), stopping any potential rumors about the business being sold.
Don’t Neglect the Buyer’s side of the Equation
It’s as important to do due diligence about prospective buyers as it is for those same buyers to do due diligence about the businesses they intend to buy.
A business owner might, for example, think there’s a buyer who is truly interested in purchasing the business – only to find that the buyer was actually engaged in something akin to corporate espionage. That can lead to business secrets getting out, devaluing the business.
Sellers should also be aware of the methods that buyers use to finance the purchase of the business. There are a few tips on financing the deal that sellers should be aware of – vendor take back (VTB) and earn-outs are two such financing methods that sellers and buyers may both find advantageous.
Don’t try to Figure out the Value of the Business Alone
There are a few common ways to value a business – and they range from quite simple to inordinately complex. Different buyers, sellers, and brokers will use different methods to value a business. There’s no one method that’s strictly better than another – each method provides a different snapshot of the complexities regarding the financial health of a business.
Sellers should not try to determine the value of the business on their own, in part because they might undervalue their business simply by choosing the wrong method of valuation. This is where the financial advisors and accountants on an M&A team will come in handy – they can help business owners determine which methods of valuation are best suited to which types of buyers. In addition, they can determine which method of valuation best represents the financial health and value of the business.
Don’t Neglect the Structure of the Sale
There are, basically, three ways in which a business may be sold: selling the assets, selling stocks/equity, and through a merger.
Generally, small business owners only need to concern themselves with the first and second methods – mergers are extremely rare for SMBs.
Asset sales are somewhat less complicated than stock sales, but that lack of complication comes at a cost – the buyer generally benefits from asset sales, while the seller would prefer a stock sale.
Buyers will generally prefer asset sales because they allow buyers a degree of flexibility come tax time. When assets have been purchased, they can often be “stepped-up”, increasing the value of tangible assets they’ve acquired and allowing for re-depreciation.
Sellers generally prefer stock sales because the proceeds are taxed at a lower capital gains rate. Additionally, stock sales transfer liability from the seller to the buyer.
Note the word “generally” used in both cases, here. Things like stock purchase agreements can, for example, keep some liability with the seller. That’s why it’s essential the business owners understand the structure of the sale before committing to selling their business – something a well-staffed M&A team can certainly help with.
Take Caution when Selling a Business
A business owner has a lot to lose if they’re not careful when they sell their business. They should create a plan to sell years before they actually decide it’s time to retire. Doing research, getting business valuations, and assembling a team are all useful steps they can take in advance.
Selling a business properly takes time, patience, and cash, but doing it right will mean more money for the business in the long run. Following the steps laid out in this article can help business owners save money – and enjoy their retirement (or their next business) to the fullest.
