By Andrea Haitz, Bray Business Advisors Group
Selling a business is rarely a decision someone makes overnight. For many owners, that business represents years or even decades of hard work, personal sacrifice and financial investment.
Unfortunately, some owners wait until they are exhausted, overwhelmed or facing an unexpected change before they begin thinking seriously about a sale. By that point, they may have fewer options and less time to address issues that could affect the value or marketability of the business.
Even if selling is only a possibility somewhere in your future, preparing early can help you make decisions from a position of strength. Here are four common mistakes I see owners make and what you can do instead.
One of the biggest mistakes is waiting until you desperately need to sell.
Owner burnout, health concerns, family circumstances or changes in the industry can quickly turn a future goal into an immediate need. When that happens, the owner may not have enough time to improve the business, organize its records or consider multiple transition options.
A rushed timeline can also affect negotiations. If a potential buyer senses that an owner must leave quickly, the seller may have less leverage and feel pressure to accept terms that do not fully support their goals.
SCORE recommends beginning exit planning well in advance, noting that many experts suggest starting three to five years before a potential transition. That time can be used to strengthen operations, develop a successor, understand potential tax consequences and increase the transferable value of the company. SCORE
You do not need to know exactly when or even whether you will sell before beginning the conversation. Early planning simply gives you more control.
Business owners understandably have an emotional connection to what they have built. However, the amount an owner hopes to receive and the value the market supports are not always the same.
Obtaining a professional valuation or opinion of value early can help establish a realistic starting point. It can also reveal which parts of the business support its value and which areas may need improvement.
The U.S. Small Business Administration identifies three commonly used valuation approaches:
A valuation may also consider less tangible elements, including the company’s brand, customer relationships, intellectual property and future earning potential. U.S. Small Business Administration
Understanding value early gives an owner the opportunity to ask an important question: If the business is not currently worth what I need it to be, what can I do about it?
The answer may involve improving profitability, reducing owner dependence, diversifying the customer base, documenting processes or strengthening the management team. Those changes generally require time, which is another reason not to wait until you are ready to leave.
A promising business can still become difficult to sell when the financial records are incomplete, inconsistent or hard to understand.
Potential buyers and their lenders want to see a clear financial picture. Depending on the transaction, that may include tax returns, profit-and-loss statements, balance sheets, payroll records, accounts receivable, debt obligations, leases and documentation relating to major assets.
The IRS notes that accurate records help owners prepare financial statements, track income and expenses, establish the basis of property and support information reported on tax returns. Internal Revenue Service
Clean financials do more than help a buyer complete due diligence. They can make the company easier to understand and help support its value. Disorganized records, unexplained expenses or significant differences between financial statements and tax returns may create uncertainty and uncertainty usually feels like risk to a buyer.
Before bringing a business to market, owners should work with their accountant and business advisor to identify missing information, separate personal and business expenses where appropriate and organize supporting documents.
The goal is not to make the business appear perfect. It is to present information that is complete, accurate and defensible.
Telling employees, customers, vendors or competitors that you are considering a sale may feel transparent, but sharing that information too early can create unnecessary uncertainty.
Employees may worry about job security. Customers may question whether service will change. Vendors may reconsider terms. Competitors may use the information to their advantage. Even when a transaction is progressing well, there is no guarantee it will close.
The International Business Brokers Association identifies confidentiality as a significant benefit of working with a business broker. A broker can market the opportunity through a blind profile that describes the company without publicly revealing its identity. International Business Brokers Association
That does not mean no one can be informed. Certain key employees may need to assist with documentation or answer operational questions. When that becomes necessary, the decision should be made strategically, with appropriate confidentiality protections in place.
The important point is to control the timing and flow of information rather than allowing news of a potential sale to spread before there is a communication plan.
Selling a business involves financial, legal, tax, operational and personal considerations. No single professional should be expected to handle every aspect of the transaction.
A well-rounded advisory team may include:
The SBA similarly recommends seeking guidance from legal counsel, a business valuation professional, accountants, bankers and other qualified advisors when preparing to sell or close a company. U.S. Small Business Administration
As a business advisor, my role includes helping owners understand the process, identify appropriate resources and assemble the right team. Bringing those professionals together early can uncover potential issues while there is still time to address them.
Preparing for a future sale does not commit you to selling. In many cases, the same improvements that make a company more attractive to buyers like: cleaner financials, stronger systems, reduced owner dependence and better planning also create a healthier business to own.
The most important step is simply starting the conversation before burnout or outside circumstances make the decision for you.
Whether your potential transition is one year away, five years away or still uncertain, Bray Business Advisors Group can help you understand where you are today and what steps may position you for the future.
Your business deserves a strategy, not just a listing.
