Top 9 Mistakes To Avoid When Selling A Business
In the words of Sam Levinson, “You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” When it comes to selling businesses the biggest mistakes have, hopefully, all been made. In the grand tradition of learning from the failures of others, what business selling mistakes do we need to avoid?
Don’t handle the sale yourself.
Selling a business isn’t like selling a product or service. If you want to maximise value, minimise stress and ensure the best chance of success, use an expert’s assistance. A vendor-created Sales Memorandum is a dead giveaway, buyers will know that there’s no broker involved. The lack of an intermediary to provide the usual confidentiality buffer just acts as confirmation of the amateur status of the vendor. Amateurs are easier to exploit. Bear in mind also that some investors don’t want to deal directly with vendors because vendors’ emotions and personal attachments to the business get in the way.
Don’t tell the wrong people that the business is for sale.
Should management, staff, customers or competitors discover your intention to sell it could spell disaster for the business. If your sales have suddenly tanked, your employees are rushing to use up their annual leave or suppliers have reduced your credit ….the cat’s out of the bag! Many investors view non-private listings as damaging to the business and they steer clear. Be careful who knows about the sale.
Don’t underestimate the time and effort this will take
Selling a business always demands more time than vendors realise. Whether caused by onerous buyer requests, or deals falling through and requiring the vendor to start from scratch with a new set of buyers, selling can become an all-consuming project. It’s not unknown for owner-managers to get so distracted that the business suffers. Should buyers’ smell a vulnerability they’ll delay closing and hold out for the next quarter’s figures. They know that a drop in performance can be used to re-negotiate price.
Don’t have unrealistic price expectations
Vendors who are least likely to sell are those who’ve valued the business based on what they’ve invested, what they’d like to retire on or the jackpot valuation their broker used to persuade them to sign his contract. Get multiple valuations from brokers as well as from professionals who don’t have a vested interest in talking up your expectations.
Don’t emphasise your own importance
Vendors often make the mistake of attributing business success to their personal efforts, their unique skills, their contacts in the industry. No buyer wants to pay the “main asset” to go away. The larger the reliance of the business on a particular individual the greater the risk buyers perceive in the investment. Greater risk for them translates to lower price for you.
Don’t start the process until you’re ready for it
It’s not just accounts and records that you need to get straight. Buyers will want to examine the most mundane of things. They’ll ask for copies of employee contracts, they’ll question stock valuations, they’ll go through VAT records the way a tax inspector would. If you have a competent business broker or other adviser assisting you they’d prepare you for this due diligence well before you actually go to market.
Don’t take shortcuts with the legal documentation
This isn’t the occasion for rewording a draft you got off the internet. Don’t do it with the NDA, don’t do it with the Letter of Intent and certainly don’t do it with the final Purchase-Sale agreement. This is particularly so if there’s any seller note, earn-out or credit element involved… or warranties and indemnities you’ve extended to the buyer. Use a lawyer specialised in business disposal transactions, not the average high street solicitor.
Don’t place too much trust in future payments
Investors often want to construct the deal such that there’s minimum cash outlay for them at the point the business is transferred. They’ll offer a higher price on paper in exchange for part of the payment being deferred. They’ll offer profit sharing in exchange for you taking a lower cash component on the day of completion. They’ll make all manner of concessions in order to reduce the upfront payment. Be aware that any promises of future payment can be reneged on (unless backed by rock solid security). Courts and the law can’t get you money out of a company that someone has run to the ground.
Don’t forget that HMRC will want a big cut
Keep an eye on liquidity. The broker’s commission on the entire deal value will be payable on completion, as will HMRC’s (the UK tax authority) pound of flesh. Any arrangement with your buyer that doesn’t leave you with the liquidity to meet these bills could be more than a tad inconvenient.