Selling a business is a complex and emotionally taxing process. Most small business owners do not have prior experience selling a business. Here is an overview of several common mistakes small business owners make during this process, which can be very expensive.
Selling a business is a significant event in the life of a business owner. By planning in advance, you increase your opportunity to achieve the best result. It frequently takes 6 to 24 months to sell a small business. Transfers to employees or family members may require even more time.
Why it matters: While the owner may be ready to sell for retirement or health reasons, the timing may not be optimal for the business. For example, if sales and profits have been declining, potential buyers and lenders will perceive that the business is in trouble, and that is the reason the owner wants to sell. If the company has had a bad year in one of the last three calendar years, lenders may be reluctant to extend a loan to the buyer.
Once other people learn you are selling, they may make decisions that are not in your best interests.
Why it matters: You should require all prospective buyers to sign a confidentiality agreement before you share information about your business. Otherwise, they may try to circumvent the transaction and work directly with your customers, or use your proprietary information without purchasing your business. If employees learn about a potential sale they may worry about upcoming changes and may quit. Your customers may be concerned about the ability of the new owner to run the business and decide to take their business elsewhere. Competitors could take advantage of this information.
Properly value your business.
Consider your industry, similar businesses, the economy and your marketplace when pricing your business. A buyer will focus on the anticipated earnings the business will generate from its established resources and its demonstrated successful track record.
Why it matters: Price your business to attract buyers and maximize your profit. Pricing a business too high will scare off buyers. Pricing a business too low can cost you a lot in time and aggravation while you to struggle to deal with a multitude of buyers, many of whom are not serious or qualified buyers.
Marketing and records.
Having good, clean records is essential in a business transfer. A potential buyer will want information about your customer base, competition, financial history and industry characteristics, such as size, growth potential and areas of opportunity.
Why it matters: Your company’s financials may need to be recast to properly reflect the value of the business. If revenue and expenses cannot be documented and supported, it is unlikely that you will receive your asking price. If a buyer needs to get outside financing for a business and the records are not consistent, a bank may reject the buyer’s request for a loan.
Prepare for due diligence.
Due diligence issues are very important to the selling process. Generally, these include business, legal and financial matters. You must be prepared and organized.
Why it matters: You must be able to defend and substantiate representations made during the selling process. Otherwise, the buyer probably will not proceed with the transaction or seek indemnity from you for damages the buyer incurs as a result of incorrect representations.
Evaluate your options and make the best selection for the long term. The best buyer is one who will close the transaction and pay you a good sales price.
Why it matters: If business sales decline when the buyer takes over, will payment of any portion of the purchase price to you be at risk?
You should continue to maintain your business at peak operating capacity.
Why it matters: All buyers will request the latest P&L statement before closing. If sales and profits are down, the buyer may demand a significant price reduction.
Before you sign a lease agreement, be sure you understand how the landlord will handle the transfer of the existing lease to the buyer. Will the landlord approve an assignment of lease or require a new lease? What fees will the landlord charge?
Why it matters: If the existing lease does not permit transfers or assignments, the landlord may use the sale as an opportunity to increase the rent. This could affect the purchase price the buyer is willing to pay for the business. Banks may also require a certain lease term before approving a loan for the buyer.
Selling a business is a process of give and take. Business owners should try to keep an open mind about all aspects of the sale.
Why it matters: It will be difficult to move forward with the transaction if you are inflexible. Often it is better to try to work out a solution with a committed buyer than to try and start over and find a new buyer.
Understand tax consequences.
Business owners should talk with their CPA to understand of the potential tax implications of a sale. How the transaction is structured effects your taxes.
Why it matters: Having a basic understanding of the tax ramifications before the process starts can keep a sale from bogging down later in the deal.
Selling your business can be complex. Business owners should consult with their legal and tax advisers to prepare for selling a business. For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or email@example.com.