The Costly Mistakes Of Selling A Business - And How To Avoid Them

It’s widely known across the industry that 98.7% of businesses listed for sale, don’t ever achieve that sale. But this could be achieved if a simple plan was in place, and the most common issues rectified.  Of course, fixing the issues would typically take a lot of time and effort, but if considering the upside of selling the business, those few extra hours of sorting out issues, would probably be the best return you’ve ever made on your time.  If you’ve been considering a sale, but you’ve not taken the steps to move forward yet, then perhaps our articles will prevent you making the same mistakes as other business owners, just like you.  Hopefully it will help you be in that lucky 1.3% of successful sellers.  


So, you’ve had enough & now you’ve decided to sell.  This isn’t a decision that can be taken lightly.  There are many things that you must do, that will increase your chance’s of achieving a sale.


Bad preparation of documents.  

These include your accounts, and other paperwork, but is just one small point that will turn any buyer off.  Trying to hide skeletons is another.  Everything is discovered during the due diligence process, so there’s little point in holding back information.  Deal with the issues so they can’t come back to bite you later.  


Unrealistic financial projections.

This is normally a situation reserved for the business start-up arena, but it's also increasingly common when a business owner wishes to sell.  The majority of business buyers have already been there, & got the tee-shirt.  Though optimism is a great trait in business, try not to be over optimistic in your business projections.

 

You Are The Business.  

For many successful owner-managed businesses, this is down to the owner managing every penny in the business.  This worked out great to maximize personal income, and it made the business appear to be highly profitable.  The problem is, without the management team in place, the business can’t operate without the owner.  A Buyer is an investor, they aren’t buying a job.  If they wanted the daily grind, they could quite easily go out and get a 9 til 5 day job.  A buyer wants a business that provides them with predictable returns on their investment, with as little input as possible.  

 

You have a handful of key customers.  

Many business owners consider having Apple Computers (or another large company) as their main customer, making up 60% of their total sales, a huge deal, believing it potentially more valuable than the average business working for ABC Local Ltd.  Granted, it's probably a valuable customer to have, and it might have taken you many years to secure that relationship.  But if that customer or contract makes up more than 10% of your total sales, then it carries huge risk to your business.  With huge risk, comes a lower valuation.  If that customer relationship dies, so does the business.  To get around this problem, work on diversifying your order book.  Some ‘experts’ or advisers will agree that diversification is important, but they might state much higher figures such as 20% diversification.  As a business buyer ourselves, we disagree.  If the customer leaves, but the customer equates to 20% of your profits and sales, in a company of 5 employees, that means 1 employee loses their job.  More importantly, you have cash flow to consider.  If 20% of your annual revenue is from your key customer, but that customer becomes an unpaid debt, unless your cash reserves, and net profit are in excess of 20%, your business will struggle to survive.  By using the 10% rule, if something should happen, your existing cash flow and reserves should be sufficient to support the business until the issue is resolved.


The same can be said for your key suppliers.  Having a variety of suppliers can reduce risk to the business, should one of them fail, or stop supplying your business.

 

Knowing Why You Want To Sell.  

Any serious buyer will be interested to your motivations around selling.  If you can’t come up with a good answer, some buyers may choose to walk away.  Be honest.  Understand that every business has weaknesses.  A serious buyer understands that you have weaknesses, and may have even seen them, before you get a chance to tell them.  The point is, being honest and upfront, helps to build that trust, but it also lets the buyer identify what they can bring to the deal, to strengthen the business and make it happen.  What does your life look like after you’ve completed the sale?  Perhaps your reason for selling is just because you want to retire.  Let’s be honest, for the majority of businesses over the next few years, that’s exactly what the reason will be.  But if your 25 years old, using retirement as your reason, will not be taken seriously, and you’ll lose credibility with the buyer.  It’s worth considering whether you truly do want to sell.  A buyer will spend considerable time and resources on doing a deal, & if you pull out before the deal completes, these costs could well be passed onto you.  This is another reason, that you need a strong ‘why you want to sell’.  Without a strong ‘why’, it communicates to the buyer, that you might not be fully serious.  

 

Selling a business is a team effort.  

The buyer will drive the deal through, but it's also up to you & any other professional advisers to be pushing the deal through.  If something needs to be done to progress the deal, this should be the number one priority for everyone.  Of course, this is why you’ve input a management team, to free your own time, and deal with these issues.

 

A Guess estimate of your business valuation.  

There’s only one thing worse than guessing what your business is worth, and that’s having a business broker value the business.  Both of these valuations are far removed from what the market is actually willing to pay.  From a buyers perspective, a business is valued based on risk and liquidity.  A buyer needs to have their investment returned to them, within a certain time window.  Normally 2-5 years maximum.  That means a buyer expects to see an annual return of 20-40%.  The valuation method that most buyers use, is a multiple of profits.  This multiple is normally between 2-3x.  Remember, if you’re tempted to get a ‘free’ valuation from a broker, these brokers have a vested interest in giving you an outrageously high valuation, because their listing fees are based on a percentage of the valuation.  Ironic really!  

 

Valuations aren’t based on promises.  

Valuations are based on what’s already been, and is recorded for all to witness.  You can’t value a business based on potential.  If a business has potential, the new owner will be the one who carries the risk to see it realised, so why would they pay a premium today, for such a privilege?  But many business owners will make outlandish predictions, they’ll state, they have a customer who will be giving them £10m of business over the next three years, as such they’ll value the business based on that future income.  Well, a lot can happen over three years, one of which being that plans get shelved, and such predictions never materialise.  Although any serious buyer will see future orders as good news, that just means they’ll choose your business above a business with no future prospects.  It doesn’t mean they’ll pay more for it.  The fact is, they’ll either buy, or they’ll walk away.  There’s another deal around every corner, and soon they’ll be two, three or four deals around every corner.

 

Expecting Cash Upfront.  

Unless your business employs more than 200 staff, and is a major player across the industry, with revenue in excess of £20m, then you won’t get a cash upfront deal.  Small businesses aren’t purchased using a cash upfront deal.  This is generally because they carry a lot of risk and uncertainty.  The typical method of selling a small business, is on an ‘earn out’ basis, whereby you receive chunks of money over an agreed period of time.  In the rare occasion that you do receive a cash upfront deal, the valuation will be significantly less than the ‘earn out’ option.  For example, rather than being a multiple of 3x profit, the valuation might be a multiple of 0.5x or 1x profit.  With such a deal, there might also be an element of delayed payment, based on whether customers retain contracts with the business after the seller has left.  

There are many ways to reach a deal that works for both parties.  Don’t get hung up on the payment structure.  Remember, that your objective was to sell the business.  Achieving that sale is the only thing that matters.  

 

Upfront Listing fees with a Business Broker.  

Using a broker to sell your business will mean paying some extortionate upfront fees to list the business.  If you’re in the lucky 1.3% of businesses that achieve a sale, you’ll then have to pay a success or completion fee.  Not to mention of course, any marketing fees, consultancy fees, along with expenses.  These fees will vary between brokers, but they generally have a minimum retainer fee of between £30,000 - £50,000.  The listing fee is based on a percentage of their valuation, but varies between 5% - 8%, with success fees going as high as 13%.  With the worst record in history on selling, it could be said that using a business broker to sell your business, is just throwing good money after bad.  

 

Some brokers offer ‘no win, no fee’ terms.  

Although very rare in the market, understand that everyone needs to eat.  First of all, if a business doesn’t sell within a certain time window, brokers start to get hungry.  A broker can only get hungry for so long, before it dies of starvation.  If you’re tempted by the ‘no win, no fee’ broker model, understand the terms and the small print behind the agreement.  The success fees will typically be much higher than other traditional brokers, and most will have very lengthy and onerous terms in the contract, which means if you pull out of the agreement, you’ll have to pay some very heavy penalties to cover the loss of potential earnings for the broker.  This goes right down, to even changing the shareholders, or directors without the broker ‘selling’.

We hope you’ve received some value from this article, and some information that you can use to move forward toward your vision.

 

If you’re confident that selling your business is the way to go, or perhaps you’re undecided, it’s important to consider the significant amount of effort and resource you’ll need to make it happen.  It’s a full time job. - The time investment alone is enough to put anyone off.  So imagine for just a minute, that you didn’t need to do all of this work.  What if this could be done over the next 3 - 5 years (by someone else).  Everything we’ve listed in this article, is what you’d need to do, if you were selling through a business broker, or direct to a buyer.

 

Unlike other private equity firms, our focus is on growing businesses at the smaller end of the market.  We’ve worked in, and grown our own businesses in the exact same fields you work today.  We’ve spent years coaching and supporting small businesses just like yours, developing their teams, and helping them to grow, but now, we’d like to help you.  

 

We have a solution for business owners that need to sell their business immediately, or for those who want to stick around for a few years.

If you’re considering the options to grow or sell over the next five years, read more about how we're helping others just like you. Click here to read about our unique approach to helping you get what you want with the YokeFormula™ for your business.

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