Top Mistakes When Selling A Business, Part 1: Being the Key Employee

One mistake when selling a business is being the key employee.

In this series of articles, we will go over the top mistakes business owners make when they decide to sell their business. No matter how valuable your business is, selling it can be surprisingly difficult. Exiting your company for the highest price and within a reasonable period can be tough. Many varying financial and economic factors can affect the chances of a successful sale. Committing these fatal mistakes can lead to not being able to successfully close the sale at all.

The good news is there are several elements that are fully in the hands of the owner of the business. If you are aware of the common mistakes and pitfalls to avoid, you can increase the value of your company and make your sale offer irresistible. Unrealistic expectations and lack of preparation and planning are among the common mistakes owners make when contemplating selling their business. The series of mistakes we will explore need to be eliminated completely before even thinking about selling.

Deadly Mistake 1: Being The Key Employee

The first deadly mistake we will discuss is being the key employee. A key employee is someone with a majority ownership and decision-making role in the business. The Internal Revenue Service defines a key employee as someone who has more than 5% share in the ownership of the business or someone who receives a certain high level of compensation.

The business world knows the key employee as someone around whom the entire company revolves, the one with all the consequential contacts and expertise of the internal operations. Some business owners make it a point to be the end all and be all of the business. This type of business owner believes that “the key man is the key man,” but if you build your business around yourself, then… our condolences! This grave mistake can hinder the ability to sell your business.

You might be the one who built your business from the ground up and sacrificed much to take your business to its current enviable position. Surely, you should be the main person in your own company, right? Well, that notion is not entirely true. By resisting the necessary delegation of power, authority, and responsibilities you not only hinder the ability of your business to realize its full potential, you also make selling it a hard proposition.

What This Mistake Looks Like From The Outside

Think about it. The company or an independent buyer that is going to acquire your business is not merely interested in the physical assets. Your brand, your reputation, your market position and your company’s contracts and connections are also of tremendous value. A buyer will want to purchase a well-running business with great future prospects. If all of your business’s value hinges on your personal shoulders, your business will pretty much be useless without you!

The best way to add value to your business is to have a management team and staff that knows your business, and will want to stay on with the new buyer. A team that has had the opportunity to participate in the decision making process and has resultantly contributed to the development of your business is likely to go on without much hassle. Employees, who have considerable stakes in your business, increase the value of your business tremendously.

A buyer’s risk goes up considerably if the only key employee is the seller. If you, yourself, are “the key man” of the company without whom the entire company would crumble, the chances of your company selling for a lucrative purchase price are slim. The buyer needs to know the business will continue to perform well, even after you leave it. This is only possible if you have allowed your team in on business deals as well as the decision-making process.

It costs a considerable amount of time and effort to the new buyer to get to know the working mechanisms of a business, without an experienced and knowledgeable management team to help along. If your company culture is strongly associated with you, the new owner and his team may have a difficult time understanding or making the necessary adjustments to it. Additional resources and extra finances might have to be employed to achieve the desired results.

Consequently, the buyer will generally offer less money and and will want an extended transition period with the seller. The elongated transition period can lead to many problems and complications, making the sale process stressful for all parties involved. You can avoid all such hassles by promoting a collaborative approach in your company and taking the focus away from yourself.

Tips To Avoid Becoming The Key Employee

Planning makes sense. You need to have an exit strategy prepared beforehand if you want to sell your company in the near future. If you find yourself to be the only key employee of your company, it is time to change your tune. You need to remember that your company is bigger than you. If you play your cards right and allow others to chime in, your company can hold a strong market presence for years to come.

You need to come to a place where you can trust others to share business responsibilities. If you have hired skilled professionals and have built strong relationships with them over the years, there is no reason not to trust them with some of the responsibility and authority. Making the relevant members of your management team responsible for operating the various departments and sections of your business will improve the efficiency and effectiveness of your business.

Power sharing and delegation will make it easier for the future owner of the business to run your business without you. When it comes to delegation and allocation of power, it is important to remember to spread the power. You do not want to end up with one or two key employees who end up being indispensable for your business, as that too will increase the risk for the buyer and affect your chances of fruitful sale.

In summary, if the business owner develops an exit strategy plan, he will receive the highest value for his hard-earned work. The development of a solid exit plan requires outside expert guidance and dedicated effort, and most often culminates in lucrative results.

In the next few articles, we will explore numerous other mistakes you should seek to avoid when selling your business.