If you are planning on selling your business there are many things to consider but more importantly, things to avoid. There is a lot of work, time and effort that can go into preparing and eventually selling your business so make sure you do what you can to avoid these mistakes:
Lack of preparation
You and your business must be prepared for a high level of scrutiny when there is an interested buyer. All financial documentation should be readily available, and all payments and tax filings should be up to date. A potential buyer will perform due diligence work to ensure that everything in the financial statements agree to supporting documentation. They may also perform further analyses to assess things like gross profit margins, expenses as a percentage of revenues, working capital and debt to equity. If your business is running smoothly with strong sales, margins and ratios then the overall value of your business could increase. The most important thing is to ensure discretionary expenses; expenses that are not required for the day to day operations, are excluded from your business. To “clean” everything up it is highly recommended that you start preparing for a sale two years in advance in order to ensure the business value is maximized.
Unwillingness to use professionals
You know the ins and outs of your business, but do you know the true value of your business? Having strong business performance will potentially increase the value of your company. Typically, inexperienced sellers have a tendency of setting the price high which will drive away any potential purchasers. Getting a valuation of your business will give you insight into what gives your business value and how much a third party would be willing to pay for it. If the valuation is completed in advance, you may be able to make a few changes to maximize the overall value of your company. For best results, a valuation should be completed right before listing your business as well to determine an updated amount. This allows the asking price to be directly in line with the market and provides you with the ability to defend the price during negotiations.
Other professionals such as lawyers and brokers should be utilized to help with the sale of your business. Lawyers are necessary in transactions such as these as they will provide help with creating sale, non-compete and confidentiality agreements. A broker will cut into the overall sale proceeds, but they can be beneficial in finding a potential buyer and during negotiations. Using professional services will make sure things run smoothly, that everything is covered, you are not open to future liabilities, and they will remove any potential headaches. Priceless.
Failure to pre-qualify potential buyers
Before the sale of any business is finalized, the potential buyer will want to complete due diligence work. However, before due diligence happens there is some work that should be done on your end. Pre-qualification will guarantee sensitive information about your business is only reviewed by serious and qualified buyers. Documents like confidentiality agreements and financial background information are standard requirements for potential buyers interested in obtaining access to your financial information. Confirming that you are only dealing with serious potential buyers will save a lot of time, effort and money.
Breaching confidentiality
When selling your business, or even considering selling your business, be cognizant of who you are telling and how you are marketing the sale. A broker will be highly capable of marketing your business to potential purchasers all while ensuring your privacy. If word gets out that you are selling your business, there could be negative affects on morale for not only your staff, but also your customers. Day-to-day operations should not be affected by the potential sale of your business.
Failure to make a transition plan
A business can be completely crippled when vital staff members leave. It’s important to discuss the transition plan between yourself and the buyer before finalizing any deal. It is common to see the previous owner remain for several months to help with the transition over to new management. One thing that could assist with transition planning would be having all staff members complete an organizational chart detailing each person’s responsibilities. This will help identify who is responsible for what, and the overall expectations allowing for a smooth transition for both parties.
There will be times during your tenure as a business owner where it may be best to call in some professional help. This will not only save you time and money in the long wrong, but it will be sure to alleviate any headaches that could arise!
If you are thinking about selling your business avoid the above mistakes, or need additional information simply contact KBH Chartered Accountants at info@kbh.ca.
Mark started with KBH in 2014, obtained his CPA designation in 2016 and is in the process of obtaining his Chartered Business Valuation designation. Mark has a love for sports, especially baseball where he played in the US while obtaining his degree. He is also giving back to the baseball community by serving on the board for the Strathcona Baseball Association.