For most entrepreneurs, the sale of a business is the culmination of years of hard work. But there are a few mistakes that business owners make again and again when selling a business. BDT Corporate's Terence Healey has project managed dozens of business exits. He has identified the five most common traps that catch unwitting entrepreneurs.
We project manage business sales and over the years we have identified a pattern in the mistakes that are made by SME owners who want to sell their businesses. This has the potential to ruin the biggest financial transaction of their life. If these are not sorted out at the outset, then this could seriously impact the money that entrepreneurs will be able to secure on the deal. So what can be done to prevent this potential catastrophe? Here are the most common mistakes entrepreneurs make when selling a business.
1. Lack of planning
It is a mantra that you will have heard more than once but it is really true that when it comes to exit planning: "the sooner the better". The perfect exit strategy starts when you begin the business, but in the majority of cases most people do not think that far ahead. They are too busy working in the present to worry about the future. Yet the process of selling your business is one that is complicated and needs planning.
Traditionally, a business is simply put on the market - once an offer has been received then the seller thinks about what happens next. At this stage the potential purchaser goes through everything with a fine tooth comb and if there is a problem in the business it will soon become very apparent. The sellers are on the back foot and the purchasers use this to their advantage to reduce the asking price.
In one case I was brought into a business on the actual day of completion as a last gasp attempt to rescue the deal. One of the directors of the company was based overseas, which had not been correctly communicated to the potential purchaser, and the purchaser had discovered a serious tax discrepancy.
Consequently they demanded a reduction to the sale price by several thousand pounds and, even worse, the purchaser's forensic accountant had reported the individual director and the company to HMRC for tax evasion. The good news is that the issue was resolved quickly with HMRC but the bad news was the purchaser had by this stage lost confidence and pulled out. It took another twelve months for the business to be sold and with the worsening economic conditions the final price was significantly lower.
Thinking ahead by up to three years or longer to iron out issues before they become problems and there will be no skeletons in the closet for a purchaser to discover.
2. Confusing price with value
A common mistake made by business owners is to confuse "price"
with "value". The price is just a figure which someone is willing to offer
for the business. Value is the method of applying a set of techniques to the business through which you can calculate what that business is actually worth. If one figure matches the other then you have a business ready for sale.
Countless times at initial meetings with new clients, the client cannot either tell me what the business is worth or they can tell me their price but can provide me with no evidence to back it up. The question at every one of these meetings is "What do you think it is worth?" and my reply is "That is not a question you need to ask me, the question is what figure do you want to sell it for? Then you need to ask yourself, "What do we need to do to justify that price?"
Putting it another way, we have all sold houses. Would you sell it without
knowing its value?
Value first, price second.
3. Getting the sale price wrong
Ask yourself one crucial question: if you retired tomorrow, how much do you need to keep yourself in the lifestyle that you desire? Some of you may know straight away the annual income you would require but do you know how to convert that annual income into a lump sum? Most business sales are paid out on a lump sum basis.
In one particular case whilst I was working as a financial adviser, I was referred a new client. After 30 years, the client had recently sold his business on retirement for £750,000. He now wanted to know what to do with the lump sum. I arranged a meeting to see him. After a very short period of time it became very obvious that £750,000 was the gross amount that the business was sold for and even though structured correctly, the net amount the client would actual receive was far less than he had originally thought.
He had sold the business for the wrong price, and it was too late to do anything about it. Due to the commitments he had in his personal life the capital he had received was not going to last for very long and he was forced to take on another job.
Before you establish the sale price for your business take the necessary financial advice about what you want to do post-retirement and how much it is going to cost. Then when you value the business you will know in time if the sale of business will actually give you the price you need. If not you will have time to do something about it.
4. Picking the wrong professionals and not agreeing fees
One of the reasons that BDT Corporate exists is that I came across an individual who had paid 25% of the sale price of his business in professional fees. Now in the cost sensitive world we live in today, I am amazed that people do not think about how much they will pay up-front, and we wanted to change that.
So how do you pick out the right professional? Start by asking these questions:
The next stage is that to carry out due diligence on the professionals asking detailed information about their business which includes amongst other things:
Now this may seem like a lot of work, but the mistake made by a number of clients is that they do not do their homework.
Even more important is the relevant experience. For example, often the client's existing accountant has been working with the business for some time. They are great for the routine accountancy but they are not specialists in business sales. On the last two business sales we have completed we have had to bring in a specialist accountancy firm. Why? Is it because we are arrogant? No they were both excellent accountancy practices but they just did not have the relevant skill set for a business sale.
Remember, even if you have been working with a professional for some time, don't assume that they are experienced enough to work with you on the biggest financial transaction of your life. Ask the right questions and make them commit to a fixed budget.
5. Letting people know you are selling
One of the highest profile business sales ongoing at the moment is Liverpool Football Club. Every time a new prospective purchaser of the club is in the media talking about his desire to buy the club and take it forward, as a life long fan, my heart sinks. I know that the sale is not going ahead. Why? The most serious of investors or purchasers conduct deals under strict confidentiality and with media silence in the vast majority of cases. Why is this:
So remember Mum's the word.
Terence Healey is head of client relations at BDT Corporate Limited
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