Sell My Business – Six Mistakes to AVOID When Selling a Business in 2020
You have been working hard to build a successful business, but you know the time is approaching when you may want to sell your business. The process of selling your company can sometimes seem overwhelming, but it does not have to be that way. Start the preparation process early and you could avoid most of these business selling pitfalls!
It is never too early to start preparing your business “For Sale”, whether you intend to sell now, next month, next year, or in five years. Here are six common mistakes I see business owners are making when selling their company.
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1. Lack of “Preparation” before selling your company
Indeed, some Business Buyers will want to purchase a business and then reorganize or change the business entirely to fit the way they think it should be run. They typically feel they know better than the current owner and will make ongoing changes. However, even these buyers still like to see organization.
Nonetheless, most buyers prefer buying something more turnkey, which the new owner can continue to run “as is” in the way the previous owner did, with of course the ability to change the company’s direction if desired. It is, therefore, necessary for the owners of companies to spend the time organizing and preparing the business to be “Turnkey”. For instance, pay attention to what potential buyers will see when they walk into your business. Clean your store or office, organize your warehouse, organize your inventory, and wash and repair any broken equipment. Make a buyer feel they can simply step in and take over.
Remember some investor buyers will not be an owner/operator like you and will be looking for a Manager to take over the sellers’ duties. If you don’t have management in place it’s a good idea to start training a few employees to be your replacement when you leave. Simply tell the employees you want to train them to manage the business during your vacations or that you just want to be more flexible about other days off. Of course, don’t mention your thinking of selling!
Show your organized by preparing a quantity and cost list of your inventory and a complete brand, model, and value list of furniture, fixtures, and equipment. Such small reparations offer the feeling of a well-run quality company.
It’s OK to have a few things that could be improved on because every buyer wants to be able to add value to the business by making some positive changes.
2. Clean Books and Records or Monkey Business?
One of the most important aspects of selling a business is making sure your businesses books and records are concise and easily understood. The buyer needs to feel comfortable about the financials and feel confident that the business does indeed make the profit that the owner has claimed that it makes. The Buyers CPA will be looking for clear proof of these profits you speak of !!
Any business with “Monkey Business” Financials (Not reporting some cash/revenues or using company money to pay for personal expenses) will sell at a lower price than a business with clean books and records. The “Monkey Business” financials usually can’t qualify for SBA financing and therefore it can only be sold to a cash buyer. Cash buyers are only 1 out of 10 buyers!!
I have been told I am the “King of the Monkey Businesses”. Every year I sell several of these uncommon business species with their hairy blurred lined financials. Probably because I am very good at finding a way to prove the real profits of almost any Business. I simply look for back door and innovative ways to show and prove the hidden profits of these “not so textbook” business financials.
To start off on a good note, you should start by making sure your business uses a common well-known financial software like “QuickBooks” by Intuit. Most all buyers and all CPA’s will know and feel comfortable with QuickBooks.
Ideally, in a perfect world, your QuickBooks financials will match your P&L’s and Tax Returns. Since seven out of ten buyers do finance a portion of a business purchase, clean books and records will give almost any buyer utilizing SBA financing a great chance of an approval.
If you want Top Dollar for your business, prepare to have these financials ready:
1. 3 years of Tax Returns – 2017, 2018, 2019
2. 2 Full Years of Profit and Loss Statements – 2018, 2019
3. A “Year to Date” P&L for the current year – 2020 YTD
4. 3 years of Bank Statements
5. Buyers CPA Access to QuickBooks
We find that clean, concise, and understandable Books and Records usually translates into a shorter sales timeline, higher closing ratio, and larger Sales Price!
3. Incorrect Pricing or No Valuation of the Business
Here in the Florida Business Sales Market, we have a very active, mature, and efficient system when it comes to selling a business. Buyers use a few basic ways to determine valuation such as:
- Value of all the assets – Asset Sale
- Value based the amount of Revenues times a multiple
- Owner Benefits (Profits of the business + Personal expenses paid for by the business) times a multiple (Priced below $5,000,000)
- EBITDA times a Multiple (Priced $5,000,000+)
- Price to Earnings ratio (for Public Companies)
One of the most challenging aspects of a transaction is assessing the right price for a business. It is reasonable that most owners want the highest possible price when they sell their business, or “Their Baby”. After all the years, time, and money that has been invested in the building of the business, owners want their pay day! Unfortunately, most buyers will ignore a business with an above market price tag figuring the owner may be unreasonable. On the other side, an excessively weak valuation would, of course, leave hard-earned money on the table.
Because there are so many elements in the appraisal of a business, including statements of profit or loss, balance sheets, industry values, intellectual property, customer base, recurring contracts, quality of reviews, real estate availability, lease terms, defensive nature of the business, and one of the most important, the quality of the books and records. It is, therefore, better to work with an experienced Business Broker/M&A Advisor like me to evaluate the correct Valuation for your business. $$ Valuations are Complimentary $$
4. Not Consulting with Professionals
Business owners are creative in nature and often like to follow their own advice. Although this is a great quality, which has probably helped your company prosper, it might not be the best idea when it’s time to sell your business. The process of selling a company is not only comprehensive but also time-consuming from assessing the valuation, marketing the business, qualifying and speaking with buyers, finding the right deal structure and terms, to closing the deal. Your Job-One is to stay focused on running your business while continuing its upward revenue growth to a greater profitability. If the business begins to slip while you’re selling and not managing, all is for nothing! Can you say, “Lower Sales Price”!
Next, keeping the sale of your business “confidential”, is probably one of the most important reasons why you should be using a Business Broker professional like myself. The business owner really should stay inaccessible until we have a motivated financially qualified buyer ready to meet.
As your business is on the market, positive or negative changes in things such as financials, employees, competitors, clients, or even the way a business markets itself may prompt a change in the way we may market a “Business for Sale”. Being flexible and the ability to change our marketing strategies in one of our strengths.
In 2019, I was the #1 Ranked Business Broker in the State of Florida. Because of that, I find myself with an abundance of institutional or strategic followers that now look at every Business Listing that I list here in the State of Florida.
Next, Immigration Partners of America (My Company) has given me an added advantage by providing me with USCIS Work Visa Business Buyers from all over the world looking to Legally Immigrate by buying a qualified E-2 or L-1 business here in America.
And last but not least, several years ago I teamed up with 40-year-old Transworld Business Advisors (The World’s Largest Business Broker) which is last piece of the puzzle which gives my practice its unparalleled advantages.
Hire a professional…
5. Wasting time with the Wrong buyers
It is reasonable that business owners who are eager to sell their business on their own will focus their time on the first person interested in purchasing the company. Unfortunately, betting on a unqualified unmotivated buyer can become a costly mistake.
Next, make sure that the buyer is qualified, someone who can not only financially buy the company, but can also run it. Do they have the appropriate license and experience to handle the duties of the company? Concentrating on one customer can also block out other possible purchasers.
I try to bring as many buyers to the table as possible. Actually, juggling multiple buyers is what I do best. It can not only increase the probability the business is going to sell, but it could also increase the sales price if we are negotiating with several buyers at once. Buyer Competition is always the Key!
Who are the buyers?
• Are they a Cash Buyer?
• Will or can they qualify through SBA to finance a portion of the business?
• Do they have enough for a down payment? 10%, 20% ?
• Will they need a seller note to qualify for an SBA Loan?
• Is the buyer expecting, in your view, “unreasonable deal terms”?
In every deal there is always a buyer that is a “best fit”. Finding that buyer and knowing what to look for is where a business broker really earns their keep!
6. Not fully thinking out your exit plan
Although the ultimate objective of selling a business is to change ownership, do not forget what happens when you leave the closing table. You will probably negotiate a transition plan with the buyer during the sales process. The specifics and importance of these acceptable exit strategies should not be overlooked when we market the company. Usually the more flexible you are, the higher the sales price you may receive.
After the business is sold, you may have intended to quit, retire, or even start a new company, but it is not uncommon for buyers to ask a seller to stay on and help oversee or manage the business for a short or long time period after the sale. The same owner pre-sale management role may be needed, or one or several of the owner’s duties may be scaled back. We always know your acceptable exit options upfront before marketing your business for sale. As always, before accepting an offer, make sure you fully understand and are happy with the agreed upon business transition plan.
Thoughts or Questions?
Hopefully you may have learned something valuable about selling a business from this short blog. If you have any additional questions or would like to set up an appointment to sit down and talk, call Darrell Jones at 407-509-0121.