Top 5 Mistakes Business Owners Make when Selling their Business

As an owner of a business, it is not unusual for you to think about eventually exiting your business. The stress of running a business can be daunting, especially if you have been doing this for decades. Let’s say you decide to sell; here are the top 5 mistakes owners tend to make when selling their business.

Mistake #1 – Not taking time to prepare the company for sale.

Many business owners who operate a profitable company believe that it is run well. They have good people, and they make a good amount of money. Strong day-to-day operations and making a profit are a great place to start the preparation for exiting the company. Unfortunately, that is not the end of the story when it comes to selling a company. There are many things that buyers might look at that an owner might not consider for daily operations. Taking the time to get your company “ready” is critical if you want to potentially maximize value. This should be done at least a year in advance of a sale. Bringing in a fresh set of eyes to go through the business in its entirety can help to avoid this mistake, since someone who has not been involved in the evolution of the process and operations can give you feedback on what could add value in the eyes of the buyers.

Mistake #2 – The owner wants to sell the company themselves

Big mistake. Remember this is usually a once-in-a-lifetime event and if the business owner wants maximum value for their business, it is likely best to not try to do this alone. The buyer on the other hand, whether strategic or financial, has usually made acquisitions before and knows how to take advantage of the situation. Buyers often prefer to work with unrepresented sellers so that they can get a better ‘deal’ on the acquisition – as the seller, it is not in your best interest to give them the upper hand. Negotiations are very involved and something that may sound like a small request could end up costing you a lot down the road. You want a solid team on your side and that means an experienced M&A Advisor or Investment banking firm, along with your M&A Attorney.

Mistake #3 – Not bringing the CFO into the process.

. Confidentiality is critical, we understand that, and most owners do not tell rank and file employees and that is usually for the best. However, bringing the management team into the tent can be a good idea and stay-bonus agreements along with confidentiality agreements will usually keep a lid on things. At the very least, the CFO, controller or accounting manager needs to be in the process in my opinion. There will be hundreds of financial documents required during due diligence both upfront in the marketing phase of the sale and certainly a huge amount required post LOI. Bringing in the head of your company’s financial department can be very important in the selling process.

Mistake #4 – Not securing Key employees

Key employees play a crucial role in your business. They may be a top salesperson, or development engineer for example. As a business owner you need to ask yourself … if that person leaves, how disruptive could it be to my company? If the answer is catastrophic, then you need to get a stay-bonus agreement in place before you go to market. This will provide an incentive for the employee to stay for a defined period of time during and post-sale, typically in the form of a cash bonus. Sometimes other compensation can be provided. Nevertheless, this is something you should discuss with your M&A Advisor.

Mistake #5 – Only negotiating with one buyer

This is your proverbial “knock on the door” scenario. As an owner of a successful business, it is very common to get an unsolicited offer for your business. This could be a competitor or a financial buyer like a Private Equity (PE) firm, it doesn’t really matter. What they tend to want is for you to start communicating, provide financial documents and negotiate one-on-one. That can be the perfect scenario for them… no competition. In contrast, if you hire an experienced M&A firm, they will typically go out to hundreds of strategic and financial buyers putting them in competition with one another. That is the leverage you want. Do not fall into the trap of one-on-one negotiations with one buyer… you could be at a disadvantage.

About Touchstone Advisors

Touchstone is a lower middle market M&A firm working with privately held, family and founder businesses. We provide business sale preparation services through our Exit Advantage program. Contact us for more information.