Common Mistakes to Avoid When Selling Your Business
The decision to sell a business generally does not occur overnight.
See also Business Succession Planning
There are many issues that need to be considered about the future of the business and its owner. Owners often spend months and sometimes years thinking about how they will exit the business, how to position the company for sale and what they will do once the transition is complete. The “thinking” stage is when owners become comfortable with the idea that they will no longer be involved in the company. This stage often comes to an abrupt end when a “trigger event” occurs that requires action to replace thought. Selling a business can be a challenging and overwhelming process because of the amount of preparation and planning that should occur before the business is placed “on the market”. Depending on the circumstances, many don’t have the time needed to complete proper planning and fall victim to common mistakes that reduce value. To help clients, prospects and others avoid these mistakes, Hanson & Co. has provided a summary of the most common issues experienced below.
Poor Timing – Unfortunately, many owners make the decision to sell after years of declining profitability, partner dispute or unexpected death. This causes the sale to occur under duress or because of need, which translates into a lower sales price than otherwise could have been possible. Consider that such events happen regardless of economic cycles and, if forced into a sales situation, the seller can often lose much of their power in the deal. For this reason, it’s essential to be as proactive as possible about when the sale should occur. In addition, choosing to sell during economic upswings will usually result in a higher sales price.
Lack of Buyer Pre-Qualification – It’s important to pre-qualify a buyer as early as possible in the sales process. This ensures the buyer is sincere in their interest and will protect sensitive company and other information. Selling your business is a complex process, and it’s essential to ensure that only those who are serious and properly positioned are given access to sensitive financial, company and transaction information. Requiring any buyer interested in reviewing critical business information to complete pre-qualification documentation, such as confidentiality agreements and financial background assessments, should be standard practice.
Lack of Confidentiality – In the sale of a business, confidentially is absolutely essential. Many business owners underestimate the damage that can be done to employee relationships when they discover second-hand that the company may be for sale. Key employees may make the decision to leave, potentially migrating to a competitor or contemplating starting their own business. Beyond this, customer and vendor confidence may be impacted by such news. The end result is that your company is placed in a weak positon. Maintaining confidentiality ensures that your business interests and business value are protected.
Improper Transaction Structuring – Not paying careful attention to the structure of the transaction can end up costing the seller in taxes on income generated from the sale. It’s important to work closely with a tax advisor who can identify the most tax efficient way to structure the deal. Businesses can be sold using a variety of methods and payment terms, either stock or asset basis and with or without non-competes, consulting agreements, seller notes or earn outs. Each choice has an impact on the seller’s immediate, short- and long-term financial and tax situation. Proper structuring will allow for a favorable tax position following the sale and for years after.
Unplanned Transition Process – The selling owner often becomes so attentive to the financial details they can forget about the practical transitional issues that need to be considered. How will the company be transitioned to the new owner(s)? Will the selling owner be required to participate in a transition process? What are the terms and performance expectations? These are matters that need to be addressed and clearly understood before the sale is completed to ensure there are no unwelcome surprises.
One of the biggest financial decisions a business owner will ever make is the one to sell their company. To reap the most from years of hard work and dedication, it’s important to partner with a team of advisors that can guide you through the process. If you have questions about selling your business or transactional tax planning, Hanson & Co. can help. For additional information, please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.