Top 5 Mistakes Business Sellers Need To Avoid

As successful business owners, many sellers have built a profitable business by overcoming the many obstacles, competitive threats, unforeseen pandemics and changes in their industry and market.  Eventually, there comes a time when the business owner wants to sell their business and will need assistance.  The challenges of selling a business can be a complex process, but with proper preparation, and avoidance of common mistakes, one can dramatically increase the chances of a successful outcome.

The 5 mistakes that a business seller needs to avoid maximizing the potential of the sale are as follows:

1. Overestimating or underestimating the value of the business
2. Not preparing the business properly with a professional team
3. Breaching confidentiality
4. Not preparing for the sale
5. Rushing the sales process

Overestimating Or Underestimating The Value Of The Business

One of the most significant mistakes sellers make is not accurately determining the value of their business before putting it on the market to sell.   A seller may base their asking price on personal judgement or an emotional attachment to the business rather than using market driven financial metrics.  Overvaluing a business can deter potential buyers, add risk to the financing/lending process, and can add time consuming negotiation steps to bring the seller and buyer to agreed deal terms.  This approach of starting at an unsupported high, can lead to a below market outcome after the roller coaster ride caused by the risks outlined.  Underestimating the value of the business will lead to a seller giving up value that they have created, and the resulting benefits after the closing of the transaction.  Sellers also need to take into consideration that the value of the business is not only in the asking price but in the structure of the deal that is offered to buyers.  The best approach to avoiding these common mistakes is to prepare properly with the right professionals on your team and values of the goodwill of a business. 

Not Preparing a Business Properly With The A Professional Team

In order to maximize the potential of your sale, you need the right professional team to assist you in each step of the process.  This team includes your accountant, a tax advisor, a skilled transaction attorney, and an M&A advisor/Broker.

Having a qualified certified public accountant will ensure that your financials are in order including accurately prepared tax returns and financial statements.  A tax advisor (sometimes handled by the same CPA firm) can provide you with importance guidance on the tax implications of the sale and how different deal structures will impact your tax liability.  While most business owners have an attorney that they have worked with in the past for employee issues, vendor contracts or a variety of other legal requirements, hiring an attorney who has significant experience in business sale transactions will be critical to “paper” the deal and protect you from any post-closing issues. A transaction attorney will also want to make sure that all your business’s legal documents, such as contracts, licenses, and permits, are up to date and in good standing.  Ignoring legal and regulatory compliance can complicate the sales process and lead to legal challenges.

Working with a qualified business broker/advisor will help you navigate the entire sale process to achieve the best possible outcome. The advisor should work with you to assemble all the proper documents to receive a professional independent certified valuation of your business.  A common misconception is for the seller to believe their accountant should handle this stage.  However, the CPA is not viewed as independent by investors and lenders and their approach may not capture the real value of the business often not having access to past industry relevant transaction values.  The advisor will put together all your professional marketing materials including a Confidential Memorandum that provides potential buyers with an overview of your business, including its financials, products or services, market position, and future growth potential.  The advisor will then identify potential buyers through various marketing channels including their own databases and ensure all buyers are qualified and under strict confidentiality to protect your business.  They will offer assistance to negotiate the terms of the sale including the purchase price, payment terms, deal structure and any conditions that must be met before the sale can be completed.  A sound broker / advisor will also assist you throughout the entire deal closing stage including the buyer due diligence process, assisting the buyer with bank financing if necessary, and coordinating with both your and the buyer’s attorney on the development and signing of the definitive agreement.

Breaching Confidentiality

Maintaining confidentiality when selling a business is crucial to protecting its stability, value, and reputation. If employees, customers, or suppliers discover the sale too early, it can create uncertainty, potentially leading to employee turnover, lost customers, or unfavorable changes in supplier relationships. Public knowledge of a sale can also make the business appear unstable, reducing its perceived value and giving competitors an opportunity to poach customers or employees. Additionally, if buyers know the owner is under pressure to sell, they may use that information to negotiate a lower price. By keeping the sale confidential, business owners can focus on serious, qualified buyers while maintaining negotiation leverage. To ensure discretion, a seller’s broker must use Non-Disclosure Agreements (NDAs) and carefully control access to all sensitive information.

Not Preparing for The Sale

The goal is to make your business as attractive as possible to potential buyers.  Sellers should spend an appropriate amount of time reviewing and improving any processes or systems that are in disarray and addressing any operational inefficiencies in the business.  Additionally, it’s worth spending time upfront to identify and address any potential liabilities that include anything from employee relations issues to outstanding lawsuits or tax compliance issues.  Selling a business is a time-consuming task. Sellers must continue to focus on running your business to keep their business flourishing during the process.  Buyers will pay particular attention to the recent business results and it can positively or negatively impact buyer interest or the terms in the offer to purchase. 

Lastly, it is important for sellers to spend the time upfront to plan for their future. Having a plan in place can help you stay focused and motivated throughout the sales process.  Consider what you want to do after the sale of your business. This includes discussing upfront with your broker/advisor your objectives and your level of involvement in the transition of the business.  Many sellers, after completing the required few months transition with the new owner, have an interest in staying on as a consultant for a period of time.  For select buyers, this can be highly favorable and impact the value of the overall deal.

Rushing the Sales Process

A hurried approach to the sale process can lead to poor decisions and overlook critical details concerning the sale.  As discussed, working thru each stage of a proper process with a professional team can significantly impact the potential size and structure of the sale and mean the difference between meeting your seller’s objective or settling for a sub-optimal transaction.  Going thru a deliberate process will also protect a seller from confidentiality breaches and spending too much of his/her precious time with buyers who aren’t fully vetted, qualified or motivated.   Leveraging a proper process will also assist the buyer to meet any hurdles in bank financing and pave the way for a smooth due diligence deep dive after an offer has been signed.   Lastly, not rushing the process will help mitigate potential legal risk with buyers and ensure a successful outcome.  It is best to create a realistic timeline for the sale of your business that considers the steps involved, including valuation, marketing, buyer qualification/ negotiation, due diligence, and closing. This can help you stay on track, focused on running your business, and keep your stress level down during the process.

By avoiding the aforementioned 5 key mistakes, a business seller will increase the chances of a successful business sale and help ensure that one obtains the best possible outcome. Contact our team if you are interested in selling or buying a business.