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Selling a business: What not to do

Bob Wolter

Bob Wolter is a mergers and acquisitions advisor for Cornerstone Business Services, Green Bay, Wisconsin. He contributes this column exclusively for Cheese Market News®.

Selling your business is a complicated process with many moving parts, especially in this economic environment. Of course, you want to get the best price possible, and that will take a significant amount of planning, due diligence, negotiation and then the transaction itself. It has been my experience that the process could take as little as six months, but typically a year and possibly more. That time period doesn’t include the time needed to prepare your business for sale.

If you are not properly informed, it’s easy to make mistakes during the marketing and sale process that could cost you tens of thousand of dollars and more. Below, I outline mistakes of businesses, some of the most common errors made when selling your business and how to avoid them.

Oftentimes, business owners spend a lifetime operating their businesses, and for many selling, it is the largest transaction of their lives. So it’s extremely important to educate yourself and get it right the first time.

• Not keeping good financial records

Keeping your financial records accurate and up to date along with detailed documentation of your business history is of utmost importance. Any and all legal issues should be addressed and cleared up. Maintain a data room of business activity including monthly sales by product and/or services, and display a breakdown of costs of goods, expenses and profitability to share in anticipation of when a qualified buyer appears.

• Not considering a structure to your business sale

Today, with interest rates higher than they have been in decades, it’s important for sellers of businesses to understand that all cash at closing is not reasonable to expect due to the cost of debt incurred by most buyers. Demanding all cash at close in this environment will likely kill a deal. In order to get deals done, seller financing is much more common, and this can be done equitably with the right structure. Creative financing can be beneficial for both sides of the deal.

Be open to exploring the right structure for you. Understand the tax implications through your accountant.

Consider staying on after the sale to mitigate the risk for you and the buyer. Make sure you have an acceptable employment agreement for the duration. Understand potential requirements of confidentiality and non-compete agreements and how that could hamper your ability to be involved in other like businesses.

• Not determining the value of your business

As owner and operator of your business, you may think you know the value of your business, but you need to be absolutely sure. Otherwise, pricing your business too high will result in no buyers and will waste a lot of your time and energy. Too low of a value is unfair to you as an owner that has years of sweat equity in the business. For an accurate valuation, seek the services of professionals for a certified valuation of your business, whether that be a business brokerage firm or a CPA firm. The valuation process should take into consideration the health of your business, the current state of the market and the value of similar companies in your area and industry.

• Not having the right management in place at time of sale

Preparing your business for sale can take years. Oftentimes, sellers that have operated their business for years — even decades — do not have management in place to take over all aspects of the business for a smooth transition. The question a buyer will have is, who on your team will be able to operate the business after the seller has gone? If the seller is the face and back door of the company or is the company, that poses a great risk and heartburn for the buyer, which jeopardizes the sale.

The best way to solve this is to delegate responsibility and incentivize your employees to take on more tasks and develop more skills. In other words, can the company run itself without the owner there? Are the people in place capable to take the company to the next level? That is what Mr. Seller should strive for, and this could take years to develop.

• Not having professionals manage the sale of your business

Many business owners are very proficient at managing their businesses, but few have that expertise selling companies. If you are a first-time seller of your business, it might be prudent not to do everything yourself.

Some owners, trying to save a buck, are reluctant to spend the money to hire proven professionals such as business brokers, financial advisors, investment bankers or attorneys to navigate the sale. Doing it yourself can lead to unforeseen consequences that could be more costly in the long run. Besides, you should focus on operating your business as efficiently as possible during this process. Keep your eye on the ball.

• Not pre-qualifying buyers

As a seller, you care about your business and its employees, many of whom have been with you for years. You want to sell to someone who will operate and manage your company, maintain its mission and culture, and have the financial wherewithal to bring it to the next level.

It’s important to qualify your buyers for a successful sale. Some buyers may have a hidden agenda and may be a competitor spying on your business. Some buyers may not have the financial muscle to purchase your business and waste your time. Ask for their company’s financial statement, and ask for the buyer’s financial statement verified and signed by their attorney in writing. It’s important to keep sensitive information and key financial details from getting into the wrong hands. Confidentiality agreements and financial background statements should be completed and signed by potential buyers to ensure they are serious buyers and have the means to make a purchase.

• Not getting to know your buyer

It’s important to get to know your buyer. Spend some time getting acquainted. Determine why this person wants to buy your business. Why is it important to them? How will they treat your employees, and what are their plans for them moving forward? Will they get along? How well will they fit into the culture of your company? What is their long-term vision and goals? Getting these answers to your questions will help you eliminate buyers, attain leverage in the negotiation process, save you from avoiding problems and get you a better deal.

• In conclusion

Selling a business can be a great way to enhance your financial future. It could also cause tremendous issues if not handled right. For most of you sellers, get professional help to get you the best deal possible.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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