Selling as many businesses as we do, it’s easy to pick out which mistakes we see business owners make most often. These mistakes make their businesses difficult to sell, and they ultimately result in a lower purchase price when a buyer does come along. In order to avoid these costly mistakes, a seller needs to have their ducks in a row a few years before listing it for sale. We wanted to share what we see as the biggest mistakes business sellers make, and explain exactly how they can be avoided. As business brokers, it’s our goal to sell your business as quickly as possible and for the highest amount possible. In order to do that successfully, we need to make sure that your business is in good shape, by avoiding these mistakes.
1) Being Too Integral to the Daily Operation
Companies where the owner is the entire business, or the business operations can’t run without the owner are tough to sell. We see those businesses sit and sit on the market, waiting for a buyer who has the exact interest and skill set of the current owner. It’s not impossible to find, but it can be difficult. So, that’s why it’s important for business owners who are thinking about selling in the next few years to prepare in advance. Gradually start to pull yourself out of the daily operation of the business. Train or hire key employees to fill your roles, so that you are simply in a position where your are managing the business. Working ON the business and not IN the business is what your goal should be. If the business looks like it is dependent on you, a buyer may believe the potential for its growth will go away when you do. Therefore, take time to ensure it can run without you as its face.
Buyers look for businesses that come with highly trained employees, and more often than not, buyers would prefer to purchase a business that has a manager or key employee already in place, who can successfully run the business operations. This leads to a smoother transition between ownership, and it ensures consistency for the other employees, as well as the customers. Businesses that have a manager and a specific employee structure in place are much more likely to be attractive to buyers, and it also opens up more investor-type buyers who are looking for a business that can be run by an absentee owner. Outline each and every responsibility of all employees and include key performance indicators that clearly establish what is expected of each role. Documenting all processes and procedures, and making sure employees are trained will be key.
2) Having Confusing Financials
Businesses that have clean, solid financial records that they can share with potential buyers will make the business much more attractive to buyers. If you are preparing to sell your business, or even thinking about selling it in the next few years, there is one big thing you can do now, which could help you increase your selling price and the ability to eventually sell your business: show more profit on your tax returns and clean up your books.
Ideally, you want to want to minimize your non-business expenses or personal expenses on your tax return for the 3 years prior to listing it for sale, but 1-2 years of cleaner books is better than nothing. As with most small businesses, there are many personal expenses accounted for in the financials. Because this is so common, your business broker will perform a financial recast to add back in those provable personal expenses. Some of those add-backs are automatic, like depreciation, amortization, and interest, but a buyer will question excessive add-backs of personal expenses, so the least amount as possible in a business’s tax returns the better. Also, unreported cash income can scare buyers, since it’s often not provable, so you might want to start accounting for all of your income, including cash, leading up to the sale of your business, because no buyer is going “take your word for it.” For any questions regarding your financials or Tax Returns, always consult with your CPA for professional advice.
It’s no secret that small business owners aim to maximize expenses on their tax returns, in order to show the least amount of profit possible. While that is a common practice to minimize tax liability, it can also negatively affect your business’s chances of qualifying for an SBA loan, and ultimately could hinder your chances of selling your business. It will definitely make the due diligence process more complicated as well. The cleaner and more solid your financials are, the better. It will increase the chance your business has of qualifying for an SBA loan, and the due diligence process will be much easier for you and the buyer, because everything will be transparent and easily provable.
3) Waiting Too Long to Sell
Many business owners wait until they are exhausted and ready to retire or their business is on the decline to sell. That's the exact opposite of what you should do. You want to sell your business when you are at the top of your game – peaked out. Some will say, 'I'm making good money now. Why should I sell?' That's not thinking like an entrepreneur. The last thing you want to do is wait to sell until you are burnt out, too tired, or even worse, a health concern is forcing you to sell.
The absolute best time to sell a business is when the business is doing well, and when it has been doing well consistently for the past few years. Buyers want to see a solid track record of good owner benefit. When valuing a business, we typically look at the last 3 years of financial records, but a buyer will often request to see the last 3-5 years during due diligence. If you are an entrepreneur who likes to move from one project to the next, you know there is no better time to sell than while you are on top. Anything unexpected can happen to a business, which could possibly drag it down, so that’s why cashing out while things are good can be the best thing a business owner could do, especially if you are thinking of getting out in the near future.
If you are starting to think about retirement, and how nice it would be to have the freedom to enjoy this next chapter of your life, just those thoughts alone should be enough to start exploring your options for an exit strategy. So many hopeful retirees that come to us for assistance to sell their businesses are tired, burnt out, and have waited too long to pull the trigger. In some of these cases, they have taken their foot off the gas, and the business profits have slowly been declining year after year, which in turn, makes the eventual sales price of their business lower. The business owners who approach us early, maybe a year or two before they are ready to retire, end up being in a much better position when it comes time to sell. We can help them optimize and prepare their business for sale, which then gets them top-dollar for their business from a buyer.
The very best situation for a seller is when they appoint a business broker 1-2 years BEFORE they intend to sell. Their business broker can do an evaluation of their business’s current state and offer suggestions on how to improve their numbers over the next year or so. That way, when the times comes to actually list it for sale, the seller will be in a better financial position to ask for an even higher purchase price than they could get for the business with today’s financials. The advice of a business broker can help the seller work to get their business in the very best position to sell, and to sell for as much money as possible.