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Selling A Business

The 4 Most Common Mistakes Sellers Make

Patrick Jennings

May 19, 2009

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Selling a business requires you to do a lot of little things right. But just as importantly, there are a few key mistakes you need to avoid. These are the four mistakes I see seller make most often.

1.) Basing The Asking Price On The Wrong Things

There are a variety of methods you can use to value a business and determine an asking price. Exactly how you determine your asking price will depend on your particular situation. But in any case, your asking price needs to be a number you can support with facts: the actual past performance of the business and justifiable projections about it's future.

*Unfortunately, many sellers set themselves up for frustration and disappointment by doing one or more of the following

 *They set the asking price not based on the business' performance but based on how much they need to pay off debts (Or how much they need to retire comfortably).

 *They based the price on what they heard another similar business sold for (this is often done by people selling an Internet business).

 *They base the price on some "rule of thumb" that has no basis in reality. Many industries do have a "rule of thumb" that can help you get an idea of what "neighborhood" your asking price should be in, but they are usually much more conservative than what most sellers use.

 *They base the price not on what the business has actually done, but on what it could do IF the buyer did a whole host of things the seller never bothered to do.

Here's an example of this type of thinking taken from an actual restaurant-for-sale ad on the Internet:

"A new owner could explode profits by adding new items to the menu and staying open throughout the dinner hour (we currently are open just for breakfast and lunch). Also, there are a number of marketing and advertising opportunities a new owner could capitalize on to take this business to a whole new level."

A buyer would certainly be justified in asking this seller, if these changes are so easy and certain to be profitable, why hasn't the seller already done them.

Entire books have been written on business valuation and it is beyond the scope of this discussion, but in short, your asking price needs to be determined by the historical performance of the business. Opportunities for growth are important and should be used to motivate a buyer (and to make you stand out compared to all the other businesses that are for sale) but you can't be paid today for the work (and the risk) the buyer is going to take on in the future.
 
2.) Failing To Disclose Important Facts About The Business

Many sellers with viable and attractive businesses have killed a possible sale because they were afraid to disclose to the buyer the entire truth about the business.

Some problems your business are facing may in fact turn off some buyers, but others may be completely unfazed.

Buyers assume that any company will have some problems and will distrust any attempt on your part to present a "perfect business". Better to mention up front any issues you are facing along with steps you are taking - or that can be taken - to turn things around.

Common issues that small businesses face that may turn off a buyer are:
 
*One customer accounts for most of the company's sales/profits.

 *The business has unpaid taxes (FICA, unemployment, sales taxes etc.)

 *The lease is about to expire

 *Sales are trending down in recent years

 *Major investments will be needed to get the business up to code regarding environmental or safety standards

Whatever challenges your business is facing, the buyer will find out about them eventually. As stated above, buyers expect to find some problems, so there is no reason why you can't sell your business - warts and all . Some buyers will actually be attracted to the challenge of turning around declining sales or shrinking market share.

The bottom line is that there is no problem that is facing your business that will kill a sale more quickly than the lose of trust you will suffer when the buyer uncovers something you were trying to hide.
 
3.) Letting Professional Advisers Kill The Deal

Accountants and lawyers for both sides often view their role as one where they must "beat" the other side. Never forget: it is your business and your advisors work for you.

Sometimes a lawyer will go looking for problems he can nitpick - let your lawyer know that you want the deal to get done and that he should work with the other side to find solutions to any issues that arise.
 
4.) Failing To Run The Business As Usual Once It Is For Sale

Be aware that it may take 6 months to a year to sell your business - even a very simple and successful business will take months, not weeks to sell. It's vital that you continue to run the business as usual while you go through the sales process.
If you get lazy with collecting your accounts receivable or maintaining your inventory, your business may not be as attractive 6 months down the road when you find a hot prospect.

Also, your customers and employees will certainly notice, if all of a sudden, you lose interest in the business or stop paying attention to details.

Even after you have decided to sell, continue to run your business as if you were going to own it forever.
 
Special Note For Franchise Businesses

Some sales fall thorough because the business for sale is a franchise and the seller did not research all the limitations and requirements associated with transferring the business. If you are selling a franchised business, review your Franchise Agreement now for any restrictions and clauses that pertain to the sale of the business. It may be worth your while to hire an attorney who specializes in franchise law, as these types of transactions are often much more complicated than non-franchise business sales.

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