Thomas Edison famously said, “Good fortune is what happens when opportunity meets planning.” Statistics reveal that most business owners leave money on the table by overlooking opportunities to increase the appeal of their business to buyers. Here are some common pitfalls and some ideas for maximizing the value of your business exit:
1. Poor Financial Records:
Incomplete, inaccurate, or disorganized financial statements can deter buyers and lower the seller’s perceived value of your business.
Strong financial systems, procedures, and controls coupled with professional oversight, on the other hand, inspires confidence. Work with your CPA to ensure the integrity of your financials.
2. Underestimating The Business’ Value:
Not getting a professional valuation may lead to underpricing the business.
Working with a Certified Business Valuation Expert and a Certified Management Consultant® could point out the hidden potential in your business that you might be overlooking and provide a realistic valuation for your business.
3. Not Highlighting The Business’ Growth Potential:
Failing to showcase future revenue opportunities, market trends, or scalability of the business.
Working with a business advisor, like a Certified Management Consultant®, who is knowledgeable about ways to maximize revenues, profits, and shareholder value is usually a very good investment.
4. Neglecting Business Assets:
Overlooking the value of intellectual property, proprietary processes, a loyal customer base, or strong supplier relationships.
Your CPA, legal counsel, and business advisor can help you identify the tangible and intangible value of your business assets.
5. Unresolved Liabilities:
Having outstanding debts, legal issues, or other liabilities that could reduce buyer confidence.
Business owners should be proactive and address unresolved liabilities, as they could end up being a deal breaker. Consulting with an attorney could help you identify ways to mitigate these risks or prevent these problems from getting worse.
6. Limited Buyer Pool:
Not marketing the business widely or targeting the right types of buyers, such as strategic buyers, M&A firms, or private equity firms.
The more parties interested in your business the higher it will sell for. Business brokers typically work on commission and will collaborate with you to professionally get your business out in front of multiple buyers.
7. Weak Branding or Reputation:
A poor online presence, bad reviews, or a lack of brand development can lower the perceived value of a business.
Do not overlook the value of promoting your unique selling proposition and marketing your business. If you do not have this expertise, there are many service providers out there you can turn to.
8. Dependency on the Owner:
A business overly reliant on the owner for operations or relationships can be unattractive or lower the sale price.
Certified succession planning advisors can help you plan for your transition in a way that preserves your culture and increases the likelihood of the business’s success after you exit the business. A succession plan is a necessary part of every exit plan, and a sound succession plan adds value to the sale of a business.
9. Ignoring Tax Strategies:
Not planning for the tax implications of selling your business could result in higher tax liabilities.
The tax consequences of selling your business are nothing to ignore. A CPA or Tax Attorney should, without question, be part of your exit planning team. Certified Business Exit Consultants ® are also trained to discuss the tax implications of selling your business.
10. Poor Timing:
Selling during a downturn in the industry or without considering economic conditions, market demand, or seasonal trends.
Timing is everything! A Certified Business Exit Consultant ® can also help you determine the best time to sell your business as they are well aware of the business exit cycle, industry and larger economic forces affecting business transactions, and other market trends.
11. Not Preparing for Due Diligence:
• Failing to have all documents, processes, and compliance issues resolved can result in lower offers.
For most business owners, their business is their largest asset. A Certified Business Exit Consultant®, your CPA, and your legal counsel can guide you through this process and increase your odds of a successful exit.
12. Outdated Technology or Practices:
• Not modernizing operations, systems, or technology before putting your business on the market could lead to a lower valuation.
A Certified Business Consultant ® who specializes in operational performance can help improve operational effectiveness and efficiency while also adding to your sales price. Adding just 3% to 5% to your bottom line, for example, can increase the sales price of your business by 12% to 20%, or more.
13. Overlooking Add-Back Adjustments:
• Not identifying discretionary expenses (i.e., “owner perks”) that can be added back to boost profitability metrics.
Excess owner’s compensation, owner’s perks, owner’s health insurance or retirement contributions, family salaries, rent, non-recurring expenses, discretionary bonuses, non-essential dues & subscriptions, travel & entertainment, personal vehicle expenses, advertising & marketing costs, depreciation, amortization and interest on loans are all part of a “Seller’s Discretionary Earnings” and are added back to the company’s earnings.
14. Underpricing Tangible and Intangible Assets:
Not fully assessing the value of inventory, equipment, trademarks, copyrights, or goodwill.
A professional appraiser should be used to value the assets of the business; this will help ensure that your business assets are properly valued.
15. No Succession or Transition Plan:
Buyers may discount the price if they feel the transition will be difficult or if key employees might leave.
Sadly, about 50% of business exits are unexpected. All businesses should have a well-thought-out business exit and succession plan in writing.
16. Failing to Negotiate Effectively:
• Accepting the first offer or not negotiating favorable terms in areas like earn-outs or seller financing.
Only 5% of business owners are happy with the net proceeds from the sale of their business; moreover, 76% have profound regrets one year after exiting their business.
They say most business owners spend more time planning their vacations than planning the exit of their business. The takeaway from this article is that a business owner should collaborate with financial advisors, business brokers, legal professionals, and other business advisors to ensure all aspects of their business exit are optimized.
Whether you are starting to plan your exit, preparing your leadership team for transition, or updating your exit and succession plans, seeking professional advice is essential for ensuring a successful outcome.
