Business Owners’ Special Series #4
You started your business with a few dollars and a prayer. You have invested all of your time, energy and resources into making your business what it is today. It would be a shame to lose the value you worked so hard to build because you did not properly prepare for your eventual exit. Avoid losing business value by familiarizing yourself with seven common business mistakes and preventing them now, before you even consider exiting.
1. Wait Until You Are Ready to Sell, Then Start Preparing for Sale
This is by far the most common mistake. For business owners who do not understand that preparing for sale at the highest value is a long-term strategy, procrastination is easily justified: a sale is too far away; I'm too busy right now; I have other priorities; etc. However, if you fail to prepare before you are ready to sell, “Bottom Feeder Buyers” will swoop in to buy your business at a significant discount. How? During the due diligence investigation process, these types of buyers seek out and identify a plethora of issues with the business, and continuously knock down the price, leaving you with less than what the business could be worth. You can avoid this pitfall by working with a Certified Exit Planning Advisor (CEPA), developing a Value Accelerating Plan to identify areas for improvement and creating a track record of success that is undeniable to any buyer – Bottom Feeder or otherwise.
2. Professional Advisors are Expensive and Unnecessary
The idea that every dollar spent on professional fees will reduce net proceeds from sale ignores the fact that good advisors pay for themselves by helping owners get the most value and avoid costly mistakes in a transaction. While you may be the expert in running your business, you may not have experience with the nuances of selling a business. There are legal and tax implications that you may not have properly thought through in advance of sale. The sooner you begin discussing a business sale with your advisory team, the stronger the financial results will be. If you are relying on your current business to sustain your retirement, you cannot afford costly mistakes that arise from going through a sales process alone. At a minimum, you will need the advice of a transaction attorney, a CPA and a CEPA. You may need other specialists and advisors, but a CEPA will advise you on what additional resources you will need and explain their role to you. Strong, experienced advisors are invaluable and they will help ensure you have far more dollars in your pocket after a sale.
3. Let Offers Come to You, Then Pick One
Too often business owners refuse to discuss exit planning with their advisors, because they do not see themselves selling their business in the near future. If an unsolicited offer arrives from a potential buyer, and the amount is higher than ever expected, a business owner might rush into the transaction to avoid losing the deal. But if you have not yet worked with your advisors and prepared for a sale, then your business won't sell for its highest potential price, no matter how good the offer sounds. This is because when you have not prepared for a sale, a buyer will likely identify many reasons to lower the price during the due diligence examination of your business, which can take weeks or months. The initial offer for a business is normally not the price a buyer will actually pay, if a business is not ready for sale. Additionally, reacting to a single unsolicited offer, no matter how high the price, is a poor strategy. Buyers will pay more when they see competition. You are leaving opportunities on the table, when you do not consider your options beforehand.
4. Any Buyer Is Fine, as Long as the Price Is Right
Before talking to a prospective buyer, business owners should think hard, and thoroughly, about any and all sale objectives. After it is sold, whatever happens to the business is completely outside of your control. What will happen to your employees, customers, reputation and personal legacy? If you have strong feelings about what happens to your business post-sale, you need to have lengthy discussions with several potential buyers. You will want to know their motives, objectives, goals and their vision for your business after they buy it, so you can determine the best buyer. There is likely no perfect buyer, no one who will meet all the post-sale objectives; and once the deal is closed, you have lost control. That is why it is important to understand what you want for the business after you exit, so you can make certain you are speaking with buyers who match your exit goals.
5. I Don’t Need a Professional Business Valuation
You may not need a valuation, but it is wise to have one. Over 75% of the businesses that go to market for sale, do not sell. The most common reason for this is sellers do not have realistic expectations of value. Avoid this pitfall by getting a realistic value of the business through a business valuation. Take it a step further by getting a Value Acceleration Plan. This plan focuses on a range of potential values for your business, and where your business currently sits in that range. It can be used as a road map to identify how and where you can implement changes to your business and increase its value. A business valuation provides very helpful information for business owners, and one that is included in a Value Acceleration Plan is indispensable to business owners.
6. I Will Simply Sell When the Market Peaks
Even if you know when the market is at its peak, you may not have prepared your business for sale at that time and you will inevitably leave value on the table. Instead of timing the market, which is wildly unpredictable and completely outside of your control, focus on what is within your control. Work with a personal financial advisor to determine what financial resources you will need to fund your retirement, and how much of that needs to come from the sale of your business. A Certified Exit Planning Advisor (CEPA) can help determine what your business may be worth today. If that amount does not meet your retirement needs, implement a Value Acceleration Plan for your business and close that retirement gap. This way, whenever you decide to sell will be the right time.
7. I Will Work Until I Die
You may have no plans to ever retire, because you love what you do. However, consider this: Over 55% of business owners sell their business for reasons outside of their control – disability, distress, divorce, etc. This is why preparing your business for sale, even if you have no intention of selling it, is a good strategy. Preparation will result in the business being at its highest value at all times, making a difficult situation resulting from a premature exit less onerous. Planning for a proper exit at maximum value right now could be the most important things you do for your loved ones, who depend on your business for their financial well-being.
Planning for the sale of your business should be an ongoing process throughout the lifetime of the business. Preparation does not mean you have to sell, it just means you are ready for anything – from a lucrative offer to a life-changing event. You can fully understand your exit and retirement goals and objectives by focusing on increasing business value every day and having a road map to do that. Start now. Expect the unexpected. Be prepared. Maximize value. Retire well.
Rich Gunn leads BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich is a Certified Exit Planning Advisor and a member of the Exit Planning Institute.
The Business Owners’ Special Series (B.O.S.S.):
The Business Owners’ Special Series (B.O.S.S.) is composed of several informational articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.