8 First Time Seller Mistakes

June 2012       Download PDF      Print

Business owners selling a company for the first time sometimes make serious mistakes that can jeopardize a deal or result in a lower sale price. A successful sale requires significant preparation and strategizing as well as the same level of personal attention and commitment that it took to build the business.

To avoid making mistakes that could kill your deal or result in a lower-than-fair price, be sure you don't:

1) Under- or overestimate your company's value

Companies rarely have a current or accurate business valuation, and too often an owner's asking price is unrealistically high or low. Buyers tend to put more emphasis on current performance while sellers value future growth, so be sure to find industry sales comparables.

To limit tax exposure, many closely held businesses suppress profits and as a result, their financial statements may not reflect the company's value to a prospective buyer. A business valuation expert can review your financial statements and adjust them to eliminate discretionary and nonrecurring expenses, and other items that artificially reduce your company's value.

On the other hand, don't assume buyers will be willing to pay what you consider your company to be worth. When setting a price, be as objective as possible and take into account such factors as the current M&A market and general economic conditions. Often it is appropriate to not set an asking price.

2) Misunderstand buyers' motivation

Buyers seldom buy what sellers think they're selling. Sellers may focus almost exclusively on numbers when their buyers are actually looking at intangible assets, such as reputation, brand, intellectual property and management skills. Buyers also usually look for improvement opportunities. By highlighting areas that could benefit from the buyer's greater financial or human resources, you could enhance your company's perceived value.

3) Reveal too much to the wrong buyer

The buyer of your company could likely be a competitor, customer, supplier or employee. But if the deal falls apart, a great deal of confidential information may have been disclosed. When working with these types of buyers, keep financial and operational information confidential until you're confident that the transaction will close successfully. Break-up fees can also help protect your company and its confidential information.

4) Assume the best buyer is local

Many sellers assume that the market for their business is their own city. But today, the best investor may be across the country or, as is increasingly common, halfway around the world.

5) Neglect to prepare financial statements

When buyers perform due diligence on acquisition targets, they expect organized and accurate financial statements. Many small and medium-sized businesses often do not follow GAAP accounting. Some businesses maintain their books on a cash basis, while others incorporate non-operating expenses and other costs to reduce their taxable income. It is essential for businesses to maintain a reliable set of financial statements that adequately reflect the business's trends and profitability. This often necessitates bringing in a valuation expert to create pro forma (normalized) financial statements that adjust for mismatches between income and expenses and non-operating items. Additionally, it is important for businesses to prepare financial projections for the next three to five years to assist the buyer in understanding the growth and profitability potential of the business.

6) Mention price first

A cardinal rule of negotiation is never to be the first one at the table to mention price. Value is subjective, and an experienced buyer who sees your company's potential may have a higher price in mind. Your advisor, who has no emotional stake in your company and is thus better able to view its value objectively, can be particularly helpful at this stage of the deal.

7) Forget to plan for the post-sale future

Many business owners neglect to plan for their personal financial and estate needs after the sale of their company. If you're retiring from the work world, discuss your income requirements and tax-efficient strategies for passing on your wealth to your heirs with a financial professional.

If you don't need cash from the sale of your business and are willing to defer some of the sale proceeds, you may realize a higher price. If, on the other hand, you need an all-cash deal, buyers are more likely to lower their offer.

8) Fail to use an experienced intermediary

Owners who made ill-fated attempts to sell their own business often confess that they wish they had used an experienced intermediary. Without professional help from advisors who understand their company, industry and M&A market conditions, sellers are prone to take the wrong advice from the wrong people.

Careful deliberation

Unfortunately, the previous eight mistakes are only some of the most common first time seller pitfalls. To ensure you don't make other ones, take your time when deliberating major decisions such as when and to whom to sell and at what price. Also, make sure you retain an M&A expert to help you execute your decisions.