How Not To Sell A Business

A time comes in every business when ownership changes hands. This may be due to a closure, passing to the next generation, public listing, or selli...

  • How Not To Sell A Business
    Nitish Khanna Image Nitish Khanna

    How Not To Sell A Business

    • Monday 19th of January 2015
    • Selling

    A time comes in every business when ownership changes hands. This may be due to a closure, passing to the next generation, public listing, or selling on. When selling on, a business owner obviously wants the best deal possible, but this can also be offset by the need to keep costs low. Here we will discuss some of the most likely pitfalls to watch out for when selling your business.

    Selling a business is a complicated, involved and time-consuming process. The first question, you should ask yourself, is “Am I the best person to do this sale?”. It should not be underestimated just how much effort and know-how is involved in getting a viable, let alone great, deal. Can your company afford for you to put all that effort into selling it? Will your company carry on as normal without your undivided attention, or will automatically damage your business at a time that it is so important to look strong?

    If you do attempt to sell your business yourself, be aware that potential buyers will see this as a weakness that can be leveraged. The use of a good broker should not be underestimated. Not only will they have the expertise in much of the points we cover below, they are a buffer between you and potential buyers. This can be very important in itself. A broker can be the bad guy and the tough negotiator. The man that sticks to certain points, etc., without causing bad feeling between buyer and seller - remember you may have to work together for some time during the transition period.

    The number one issue is price. Remember the price is supposed to reflect the value of your business, it is all too easy to snatch a figure out of the air. Buyers will ask how that figure was calculated. A valuation process is needed, taking into account: assets, contracts, sales, stock, financial health, etc. Check websites offering businesses for sale in the same sector/category, location and size as yours; are you in the same ball-park? If not, can you justify the difference? It may be wise to hire a specialist accountancy firm for this and to put paperwork in the best light for sale. This is no slur on your current accountant that may have been loyally at your side for years, but there are skill set differences between day-to-day accounting and preparing a company for sale.

    Getting a third party valuation early will also allow you to address any issues found, or missed opportunities, to increase the valuation down the line. Have another valuation undertaken before going to sale as the market moves, and your new financials will make a difference. Having a broker and other professionals aiding in the sale may allow you to concentrate on keeping the ship sailing, but this is not an excuse to sit back and let them get on with it. You will provide most of the motivation, and buyers will want to see you. This is important to you also as it is your chance to convince them of your reasons for sale and instil confidence in the future of your company.

    This brings us to another major pitfall:

    Preparation - Many companies go to market with the owners clueless about what is involved, and the preparations that are necessary and critical for a good sale. Think of yourself as a potential buyer who is looking for a business in your industry, what all will you look for in a business before buying? Ensure that you have sorted out issues such as leases, staffing, security, taxes, overdue bills, and so on. Make sure your paperwork is correct and current. Management information should be accurate, clear and complete. Would you buy a company with dubious financials or staffing problems? You may need around two years preparation for selling your business, so talk to the professionals early on - starting with your accountant and a suitable broker.

    Never lie on your paperwork! It makes sense to show your company in a good light; to emphasise the good and downplay the bad. However tempting it may be, there is a wide divide between presentation and misrepresentation. Such impropriety will frighten off potential buyers. Indeed the word may get out, and you may lose them all, and it may come back to bite you later with legal action. If a buyer trusts your paperwork, then it will put them at ease.

    Part of your preparation must include answers to such questions as “why are you selling?”. Every potential buyer will ask you this, make sure you have a great answer that sounds realistic and reasonable, but not scripted. This is the major part of convincing the buyer that there are no monsters under the bed. This will also solidify in your mind just how determined you are to sell, or not. Be sure, otherwise wait until you are.

    When negotiating, pick your battle points. Allow for give and take. Over-negotiating and being inflexible will antagonise both your broker and your buyer. It is fine to have some sticking points, but there is no need to win every point. Be pragmatic. No one works for cash these days, do not push for a cash-only sale. Sellers will be put off as they will see it as dubious, and they may not reap the tax benefits or finance. Time is an important factor too: drag your feet and buyers may walk away; go too fast, and they may run away.

    Pre-vet/qualify buyers. This will save time and heartache later. Don’t be afraid this will scare away buyers, it will only scare away time-wasters and will be a buy-in for buyers. This will also help secure private information. Confidentiality is important to both parties.

    When hiring professionals, agree fees up-front. Costs can spiral and end up taking a big chunk from the sale.

    Finally, beware of bar-stool advice. Bad advice will come at you from all sides. Think how relevant the advice is, and how reliable the source with respect to it.