Did you know that, according to BizBuySell.com, 80% of businesses listed for sale do not sell and 50% of the transactions that go to contract never close? These are five of the fatal mistakes to avoid when selling your business.
1. Failure to establish a realistic asking price. There are many factors to be considered. One of the most important is recasting the prior year’s financial statement to normalize the expenses to what the buyer can expect, and understanding what will be acceptable to buyers and – separately – the banks that will offer loans for the business. The next related mistake is applying an unrealistic multiple factor to the adjusted owner benefit, commonly referred to as earnings before interest, taxes, depreciation, and amortization (EBITDA) and seller discretionary cash flow (SDCF). The factor used should be based on current comparable factors, including a comparable range of EBITDA/SDCF and the business type, sales trend, customer sales concentration, quality of accounts receivable, and market where the business is located, to name a few. This is not what normally happens – the human experience called emotion typically gets in the way and fogs rational reasoning.
2. Failure to maintain confidentially. If confidentiality is breached to customers, vendors, or employees, it can cause major problems for the business of the seller. It is critical to have a signed comprehensive confidentiality and non-disclosure agreement in place before providing any information about the business. This can be challenging if the seller is trying to sell the business without a broker or intermediary. It is important to request a bio or résumé from the potential buyer to know who the seller will be dealing with, in particular to make sure the buyer is not a competitor, vendor, or someone else who could do the seller harm if the identity were revealed.
3. Failure to financially qualify the potential buyer. This can be a real challenge for sellers trying to sell their businesses themselves, but is critical to avoid wasting valuable time. To fully understand the cash requirements, a financing model has to be prepared that shows all the closing costs and the cash injection that will be needed, as well as how much the potential buyer will need to withdraw from the business and whether the business can satisfy those requirements. Buyers and sellers typically don’t consider all these factors, or are unaware of them, until at an advanced point in the sales process.
4. Failure to continue running the business. It is important to keep the business operating at peak performance throughout the sales process. If the seller is trying to sell the business without a broker or intermediary, the distraction and time-consuming effort takeoff taking phone calls and replying to e-mails from potential buyers takes the focus away from maintaining and growing sales. It is common for only about 10% of all inquiries to be from genuine potential buyers, so it takes a considerable amount of time to work the process of finding real buyers. A potential buyer and the banks that will be loaning the money for the transaction will ask for updated financial statements. If sales and profits are down, the potential buyer will typically ask for a lower price, try to get better leverage on the terms, or worse.
5. Failure to properly package the business. Once having talked with a qualified buyer who has signed a non-disclosure agreement, it is important – in fact, critical – to provide the information you would want to see if you were buying a business, and to do so on a timely basis. Everything will be revealed in the due diligence phase of the sale; having surprises late in the process kills transactions. This information has to be organized in a logical manner and provide a clear picture of the history of the business and the opportunities for growth. Time kills transactions. Having the information in shoebox is not an option. Having a complete, accurate package and being forthright adds credibility and confidence.
Fatal mistakes 6 through 10 will follow in Part 2.
If you would like a confidential, no-obligation analysis and discussion of what you can be doing now to prepare for when you are ready to sell your business, please call (888-893-6661) or e-mail (email@example.com) me. I serve customers nationwide. To learn more about my background and see customer recommendations, visit my LinkedIn profile at http://www.linkedin.com/in/dolansales.
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