As a business owner, you do everything. If you started the business, you had the thrill of putting it together, planning it, hiring the employees, buying the furniture and much more. Perhaps as you grew, you brought in employees to help you, but you are pretty confident you can “figure things out”.
This is why some business owners consider selling their business themselves as well. Certainly they know the business better than anyone else. Sadly, there are many legal and financial pitfalls that lie ahead for the business owners that choose this path.
To help you avoid these pitfalls, here are the most common mistakes business owners make when trying to sell their business themselves.
1. Not establishing fair market value. The real value of any business is what someone is willing to pay for it. Without seeing the information about comparable businesses and having a feel for what buyers want, you cannot establish a fair market price. Without establishing the fair market value, the owner often wonders if they really got the most for their years of hard work in the business.
2. Letting emotions get involved. As the owner of the business, you are at a disadvantage for negotiating because you are emotionally attached to the business. It is always wiser to have a 3rd party negotiate for you. One business owner “fell in love” with a couple and drastically reduced the price of the business for them, because she liked them. Sadly, 4 months later she was suing them for not paying on the seller financing.
3. Not thoroughly qualifying a buyer. It is easy to meet someone and like them and skip fully qualifying them as a buyer. This can lead to a long, drawn-out path that wastes your precious time and destroys your business. For example, take the person that seems very interested in the business. The he asks tons of questions and you share everything you can about your business in hopes he will buy it. In the end, he says he is not interested. Months later you see him open a business like yours around the corner and takes your customers. Without asking the right questions and thoroughly qualifying a curious buyer, you might be giving your competition invaluable inside information.
4. Using standard templates for seller financing. When you offer to finance part of the purchase, this opens you up liability as the owner. What if the new owner does not pay you? What repercussions do you have? If you had a template agreement, you might not have much protection as you think. These agreements are often not specific enough and most offer little protection. Using a legal professional familiar with seller financing can not only protect you financially, but also legally if you ever have to take action for nonpayment.
5. Choosing wrong closing attorney. Many business owners are not aware that there is a difference between a deal-maker attorney and a deal-breaker attorney when selling businesses. Some attorneys will “kill” the deal at the closing. Others will work hard to help make the deal fair and help you sell the business. Without experience with an attorney, you are taking a huge risk whether they will really help you get the deal closed or will break the deal at the last moment. Not all attorneys are the same.
6. Business stagnates or slows down. As the owner, when you focus on the task of selling the business, often the business slows downs or stagnates. This becomes a red flag for a new owner and reduces the value of the business. It is a highly time – consuming task to sell a business. Between marketing the business, answering potential buyer calls, getting documents together, responding to attorney / account requests; it is easy to take your eyes off growing the business. Because the value of the business is based on the most recent activity, this will drastically impact your selling price.
7. Advertising the business for sale. It is naturally to think, “I’ll just put a sign up: Business for Sale.” This might be the most expensive mistake any business owner could ever make. When it becomes known that a business is for sale, the vendors, employees and competition often react in a negative way. One bar dropped 30% in sales when it was rumored to be for sale and it took 3 years to recover. When selling a business it is critical for that information be held in the highest of confidentiality and no signs should be posted or open conversations about selling in front of customers or employees to keep the value and integrity of the business for the new owner.
8. Improper allocation of selling price. When selling a business there are multiple items being sold and the allocation of price greatly affects the amount of taxes the owner will pay. Not using an accountant that specializes in business sales can cost a business owner in overpaid taxes.