DWT recently hosted “The 12 Most Common Mistakes to Avoid in Selling Your Business,” a seminar examining the common challenges affecting owners of family and closely held businesses on the subject of succession and estate planning. The seminar was led by a team of panelists, including DWT attorneys Keith Baldwin and Matt Loftin, Kristofer Gray with Integrity Financial, Dan Gaffney with Moss Adams LLP, Leif Johnson with Exvere, and Lisa Forrest with the Banc of California.
The 12 most common mistakes to avoid when selling your business are:
1.) Failing to know how much your business is worth.
A critical first step in considering a potential sale is going through a formal valuation to understand what your business is worth to a third party. An experienced valuation expert will help you arrive at a fair market value upon which your succession planning can be based. Moreover, a formal valuation will prevent you from having unrealistic expectations about the value of your business.
2.) Failing to consider all tax ramifications.
Tax planning is an essential part of any business sale because it is frequently one of the biggest expenses. Failing to consider tax ramifications can negatively affect the value of your company, your personal wealth as an owner, and the amount of wealth that will be passed along to your successor.
3.) Failing to assemble an experienced deal team.
Getting the best price for your business requires assembling an experienced and professional deal team far in advance of the sale. Aim to select first-class CPAs, investment bankers, and attorneys with an in-depth understanding of issues specific to M&A transactions.
4.) Failing to think through exit options.
Most business owners do not take the time to learn about the different exit options available because they are focusing on building their business. While it is not “fun” to evaluate exit strategies, determining which strategy fits best with your personal and business goals will prevent future disputes and establishes a blueprint for succession.
5.) Failing to have a clear picture of your financial needs post-sale.
Some business owners are meticulous about maintaining their company’s finances, yet they do not take the time to map out their personal finances. You should have a clear understanding of your financial needs post-sale because it will give your advisors a clear roadmap on price and deal negotiations.
6.) Failing to understand the terms of the sale.
When reviewing the acquisition agreement, it is essential that you look beyond the stated purchase price. Sellers frequently overlook other parts of the agreement, such as earn-out provisions, that directly affect the cash they receive post-sale.
7.) Failing to be emotionally prepared for the sale process.
The decision to sell your business will rank among the most difficult. The stakes are high and for many, it is a one-time event for which they have no prior experience. Prepare in advance for a difficult emotional journey.
8.) Failing to integrate estate planning techniques into the succession plan early on.
Whether you plan for the proceeds of the sale of your business to pass to your descendants or to your favorite charity, in order to ensure that you transfer the business at its full value, it is essential to implement a well-thought-out estate plan long before a sale is on the horizon.
9.) Failing to understand the deal from the buyer’s point of view.
Sellers should gain an appreciation for the sale process from the buyer’s side. This includes understanding the buyer’s bank lender’s requirements, learning the difference between sales price and cash flow, and understanding the working capital of your business.
10.) Failing to keep the operational and management team intact.
The loss of key employees can seriously erode the value of your business for the buyer. Be strategic about how you announce the sale to your employees and consider who needs to know about the deal before it is complete. Evaluate whether you want to inform key employees early in the process in order to gauge their future intentions and give you time to incentivize them to stay with the business under the new owner.
11.) Failing to sell on an upward trajectory.
Do not wait too long to sell. It is natural to want to hold on to your business when things are looking good, but to want to dump it when things are looking bad. The ideal time to sell your business is when profits are high and indicate an upward trajectory.
12.) Failing to think critically about life post-sale.
The sale of your business will not only impact your finances; it will impact your personal identity, your relationships with family and friends, and your reputation in the community. Think about the challenges that are likely to arise and prepare for them in advance.