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Top Mistakes When Selling A Business, Part 2: Lack of Preparation

03
Apr

In this series of articles, we are going through the top mistakes owners make when they decide to sell their business (in case you didn’t read it, check out Part 1 here).

ING_39829_12066-300x200 Top Mistakes When Selling A Business, Part 2: Lack of Preparation Blog
Deadly Mistake 2: Lack of Preparation

As an owner, selling your business is arguably the most important decision you can ever make. When it comes to exiting your business, the stakes are high and the chances to make a mistake are significant. One wrong step can cost you a substantial amount of money, or may lead to not being able to sell the business at all. If you know about the mistakes business owners tend to make when selling and fix them before even considering your exit, you are likely to fare much better.

Deadly Mistake 2: Lack Of Preparation

The second deadliest mistake we will discuss is not being prepared to sell the business. When you put your business out for sale in the market, you are essentially asking for financial returns against your life’s worth of efforts. Considering the importance of the decision, refusing to plan ahead of time makes no sense. You have meticulously planned for each aspect of your business over the years to ensure your business performs to the best of its abilities. Why change now?

As the traditional Boy Scout motto goes: Be prepared! This applies to when you go out camping, and it also holds true when you are selling a profitable business. It is surprising how many business owners wait for the perfect market environment and filter out the best buyer, yet fail to do the things that are in their own hands. Perhaps the most important factor that affects a business’s sales prospects is precisely the preparation leading up to the sale.

No one said selling a business is going to be easy. Most business owners have never sold a business and easily get overwhelmed with the process. Proper preparation and planning can save you all of that hesitation, confusion, and puzzlement. Selling your business takes time. It should not come as a surprise that most advisors recommend to start preparing up to three years before the actual transaction takes place.

How This Mistake Looks In The Eyes Of A Buyer

You can expect any sensible buyer to carry out a comprehensive appraisal of your business to ascertain the exact value of your business. Why not do it yourself, or better yet, employ the help of a qualified team of advisors? Whether it is legal due diligence or financial due diligence, this critical step allows you to make your selling decision from a point of strength. As you already know, you can only sell a product well if you know it well. A thorough evaluation of your business shines light on all the strengths and weaknesses of your business, and helps you prepare for your sales pitch.

You can only expect a profitable deal if your financial house is in order. It is important to have a solid financial system in place, properly recording critical data on daily, monthly, quarterly, and yearly basis. A buyer has a right to know how much profit your business makes and its sustainability quotient. They need to know if you have any standing tax liabilities or other visible and hidden liabilities.

Buyers are likely going to ask for your detailed income statements, balance sheets, and audit reports to satisfy their own due diligence requirements; it is important that your business is prepared for this. Having accurate monthly financials with at least 3 years of tax returns is critical. Therefore, the time to prepare for selling your business is now! It is not advisable to wait until the last minute and scramble to get your finances in order.

Your market standing, your diversified customer base, as well as your clients and suppliers are what a buyer is interested in. Buyers will ask for breakdowns by customer and other segments so that they can accurately understand what is driving the business. You must be able to present a comprehensive picture of the demographics that purchase your services and products and the qualities of your products which give you an edge over your competitors.

How To Avoid This Deadly Mistake

Customer contracts, supply agreements, marketing and advertising agreements as well as loan and financing agreements are some of the documents you will also need to reveal. To provide credibility and experience in the financial due diligence phase of selling a business, it is important to have a good CPA on your team, as they can ensure proper documentation and the essential financial compliance of the various operations of your business.

Proper due diligence will act as the main pitch to the buyer, but will also help you value your business accurately, while identifying any legal or regulatory issues that your team of advisors can help you rectify before sale. It can help keep a check on potential regulatory concerns, like permits and orders, pending litigations, or any violations of the law. Such issues can be magnified when you fail to disclose them to the buyer and the buyer discovers them during their due diligence period.

No one likes surprises! When planning to sell your business, it is best to have all of your deals and contracts properly documented. Your side deals, handshake deals, or implied  understandings need to be in ink and on paper for them to be of any use to the prospective new owner of your business. Everything should be out in the open when selling your business. Transparency can make yours and the new owner’s lives that much easier, and may very well increase the value of your business or shorten the closing period.

Since you have made the all-important decision to sell your beloved business, why not sell it in the best possible shape and condition? A serious due diligence effort can help you stay away from the hypothetical and realize the exact as-is value of your business. It can also help you identify the areas of your business that can benefit from a little extra attention. Spending a little time and effort to close the holes in your internal systems and processes may allow you to ask for more when selling your business.

In order to chart the path towards optimal preparation before placing the business on the market, business owners will do well to begin early conversations with a qualified advisor that will stay by their side during preparations and until after the sale is finalized.

Stay in touch as we explore a few more common mistakes business owners make when they decide to sell their business.

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