Oct 8th, 2013 by Achim Neumann, President
Quite often, business owners attempt to sell their company “on their own” once they are ready to retire. However, the process of selling a business is fraught with unknowns that make it so difficult – often with far reaching negative impact.
“There is no question that it appears tempting to save on professional fees by trying to sell the business on one’s own”, say Achim Neumann, President A Neumann & Associates, New Jersey. “However, as the old saying goes ‘good advice will cost some money – bad advice will cost a fortune’”. ” Never is this adage truer than in selling one’s business.
“This article will illustrate some of the top mistakes, “ says Michael Feite, Managing Director, Eastern PA.
1) Business Too Dependent On Owner
If the business owner handles all decision-making himself, it will be virtually impossible to provide a smooth transition. This situation becomes even worse, if the business owner is actually handling all sales, too. Whereas administrative functions can be successively transferred, long-term sales relationships typically take more time to transfer to new owners or managers.
Thus, the business owner needs to start delegating responsibilities early on, and needs to develop an organizational chart for the company that provides for clear responsibility assignments.
2) Lack Of Proper Valuation & Tax Planning
“Amazingly, many business owners have a very sophisticated and thorough understanding of the market place for their products”, says Michael Gersten, Managing Director, North NJ / Southern NY State, “but are willing to sell their company without any proper valuation in the market.”
Obviously, a low asking price will leave money on the table, however, more importantly – and unbeknownst to many sellers – a high asking price will not only prevent a business from being sold but it could ultimately compromise the confidentiality of the transaction, because too many buyers will have seen the business but then shied away.
And whereas a proper valuation on the front end is very important, tax planning on the back end is just as important. It does a seller little good to have obtained one hundred percent of the asking price, only then to turn 50% of such over to the IRS or State government.
3) Deal Structure
As we’ve said above, deal structure is very important with respect to valuation and tax planning. More importantly, often sellers rush to the highest bidder.
However, price is most likely less important than deal structure: for example, is A/R and A/P included? How will employee retirement obligations be treated? What assets secure the seller note? On what basis are royalties calculated, and what audit mechanism is in place? What kind of consulting and employment agreements will be put into place for the seller? Will SBA bank acquisition financing allow for a seller note pay-back?
“We can easily present a seller four deals with the same offering price, but with vastly different net receipts”, says Neumann.
4) Hiring Your Daughter-In-Law To Do The deal
As mentioned early on, selling a business on one’s own has significant risks. Selling a business is a very specialized process that requires knowledge across a variety of professions.
As dangerous as trying to sell your own business is to hire a relative because “he or she is in the legal or accounting field.” As in many other professions, the legal or accounting field has specialty niches and the mere fact that an individual is trained in one segment does not qualify him/her in other segments. Not to mention that one might lose the daughter in law over it!
“As a matter of fact, deals get most complicated if a seller does not have the proper advice from a transactional attorney who is specialized in business transfers,” says Feite. “Again and again, business sellers underestimate the impact of not having a proper team built – for marketing the business, as well as for legal and tax advice”
One fact that is known, though: the buyer will have a top team of consultants available! Thus, a seller needs to level the playing field. Remember: you only get to sell your company once!
5) Forgetting To Manage The Company
Selling a business typically takes 9 to 12 months. Thus, a business owner needs to recognize that he is in “for the long haul”. Getting frustrated because there is no full-price offer within three months sets the seller up for a fall. The owner needs to focus on running the company at peak performance during this time.
There will be a consistent stream of demands for financials during the process in a world that requires instant information by all market participants. Thus, books need to be kept in tip-top shape. Not focusing on top performance, resulting in a drop in results will immediately trigger the buyer’s desire to renegotiate the deal.
Another distraction can be professional opinions from the CPA and legal field that review each proposed structure with the sentence “The problem is…” A business owner needs to stay positive and filter such consistent negativity out in order to complete a deal.
Having a positive approach also includes overcoming the thinking that “the deal is dead”. Every deal is at least three times “dead” in a transaction, and still all parties find their way back to the negotiation table – with the help of proper M&A advisers.
In sum, there are many aspects in selling a business with the potential for a vast number of errors, oversights, and omissions to occur, any of which could prevent maximizing the receipts for the business seller. Only a highly qualified M&A firm or business brokerage organization has the long-term experience to address these issues, and therefore, a business owner needs to really think about what kind of transaction team he will put together for selling the biggest asset he has.
A Neumann & Associates, LLC is a professional merger & acquisition and business brokerage firm with 30 years of experience in New Jersey, New York, Pennsylvania, Delaware and Maryland that assists business owners and buyers with the business transfer process in a completely confidential manner. The company is affiliated with BBN, with 450 offices and access to a national network of qualified buyers and sellers. For more information, please contact A Neumann & Associates at 732-872-6777