Series 3
Selling a business is something that most business owners will only attempt once in their career. With an estimated 70% – 90% of their total net worth tied up in their business, they can’t afford to make a costly mistake, but their success in running their own business generally doesn’t prepare them to handle one of the largest and most crucial financial transaction in their life.
This is the third in a series of articles exploring some of the common pitfalls in selling a business.
Major Pitfall No. 5 – Exiting Without a Plan
As the generation of Baby Boomers approaches retirement, it has been estimated that over the next twenty years retiring business owners with be seeking to successfully exit their businesses, with an aggregate value in the trillions of dollars.
Without the assistance of an experienced M&A advisor and a comprehensive transition plan & process to maximize the value of their business and ultimately their own personal wealth, many of these business owners will typically:
- Exit their companies as a result of pressure from outside circumstances, not as a result of their own desires
- Exit their companies on a timetable that’s forced on them, instead of one that meets their needs
- Undervalue their companies and leave hard earned wealth on the table
- Pay too much in taxes
- Lose control of the process by being reactive rather than proactive
- Fail to realize their business and personal goals
- Suffer unnecessary personal stress
From experience, we recommend that our selling clients begin the process 2-3 years before they believe they will really need to sell the business. While some businesses have sold in as short as six months, the average tends to be closer to a year, with some businesses requiring 2-3 years before finding the right buyer and the right deal. In addition, some business may benefit from making a few changes/improvements to their business to command the best price and terms and it may take from a few months to a year or more to implement those changes.
Major Pitfall No. 6 – Loss of Confidentiality
There is probably no greater truth in all business mergers, acquisitions, and sales – for buyers, sellers and M&A advisors alike – than “Time Kills All Deals.”
A nightmare scenario for most business owners is to learn that rumors are spreading among their employees, customers, vendors, bankers and competitors that their business is for sale.
It’s only human nature for most people to suspect the worst until confronted with the truth, and we’ve all seen examples where long term, loyal employees start lining up & seriously considering their other employment options; long term, loyal customers begin qualifying back up sources “just in case;” vendors and bankers begin to reconsider if they might be over extended in the event of a sale; vendors’ sales reps soon spread the rumor to all who’ll listen, including your fiercest competitors; and competitors use the opportunity to undermine your customers’ confidence that you will always be there when they need you, etc.
In short, there is enormous downside risk from leaking the news that you’re thinking of selling, and almost no upside. For this reason, most thoughtful business owners entrust the marketing and sale of their business to an experienced intermediary who knows how to CONFIDENTIALLY market your business to the most likely and most qualified buyers, while screening out the nosey tire kickers
In my experience, no other factor has caused more potentially good deals to go bad than letting the sales process between two parties drag on and on until it eventually grinds to a halt.
Major Pitfall No. 7 – Waiting Too Long
Selling a business you’ve spent most of your working life to build is one of the most important personal and financial decisions most business owners will ever make, and for that reason, it’s important not to wait too long.
The best time to sell any business is when you don’t need to – not when the owner’s health, or other personal circumstances, or business pressures demand it. When the business is doing well, and has a string of successful years immediately behind it, with the promise of doing as well or better in the coming years, it will attract the most qualified buyers and bring the best price and terms. When it appears that the business is no longer growing and may be headed for a period of declining sales and profits, its selling price will be much lower.
From experience, we recommend that our selling clients begin the process 2-3 years before they believe they will really need to sell the business. While some businesses have sold in as short as six months, the average tends to be closer to a year, with some businesses requiring 2-3 years before finding the right buyer and the right deal. In addition, some business may benefit from making a few changes/improvements to their business to command the best price and terms and it may take from a few months to a year or more to implement those changes.
The successful sale of a business requires a carefully planned approach in which each step is done right. While owners are experts at successfully running their own organization, few are equipped to navigate this complex process and, therefore, they are at a distinct disadvantage. The use of professional advisors who can provide the expertise, support and representation required to sell a business for the best price and terms will typically more than pay for itself.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me in strictest confidence at mertel@transworldma.com
Mike Ertel, CBI, M&AMI, CM&AA
Transworld M&A Advisors
813.299.7862 Direct
©2020 J Michael Ertel, PA