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Seven Mistakes When Selling A Business


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Recent surveys have found some very sobering statistics for small business owners.   From a survey conducted by CPA Australia in March 2004:
  • 40% of business owners intend to leave the business in the next 3-5 years
  • 50% of business owners plan to use their business as a primary source for funding their retirement fund
  • 84% of businesses are very dependent on the owner
These statistics were reinforced by a 2006 survey conducted by Grant Thornton International that showed:
  • 40% of Australian businesses expected to change hands in the next 10 years, and
  • 50% of these businesses expected to sell in the next 3-5 years.
A Buyer’s Market 

A lot of businesses will be up for sale in the next 5 years – and many of them will sell for less than the owner deserves – or needs.   Some may not even sell at all, with an expected increase in business sales of between 200-300% over the next 5 years.

With so many businesses to choose from, it will be a buyer’s market.   Business owners will be playing lottery with their retirement funds if they do not enter the sale process well prepared.   The buyers will often have the chance to choose the best business for them.

What If You’re Not Selling?

Even if you’re not selling the business now, you still want to increase its value.   After all, the main goal of any business is to add value to the owners’ equity.   So how much “hidden” equity do you have in your business, and how are you going to realise that equity into your pocket?

Realising the “hidden” equity or value in a business takes time and a well thought out plan.   With most businesses being dependant on the owner to run effectively, it stands to reason that preparation will be vital in being able to convince someone else that they can run your business.

This article discusses the key issues that can stop you getting the sale price you deserve as well as highlight things you can do to improve the sale price.

The Seven Deadly Sins When Selling Your Business 

1.     No Sale Document or Information Memorandum

Going into a business sale process without preparation is one of the biggest mistakes that can be made.   It not only means you will unlikely get the value for your business that you want, but also you will not be in control of the process – the buyer will.   The sale process will take longer and most likely your business will sell for a lower price.

Preferably the sale document should be prepared by a professional, such as a broker or business advisor.   It not only sets the scene for your business, but also should explain clearly where the profits are generated and justify the price you are after.  

2.     Lack of Customer Information

Customers obviously are the lifeblood of any business, but the biggest fear of any buyer is the loss of patronage after a new owner takes over.   This fear can be reduced or removed by some simple steps in documenting and systemising the sales process:

Have a detailed list of key customers, past buying patterns, contact details etc
Ensure all sales staff have been trained in a systemised selling approach
Ensure all sales and promotional systems have been documented and all staff understand and use the documentation

3.     No Staff Training

A buyer of a business does not want to buy a “job”.   They want others to be skilled up within the business so that they can build the value of the business.   Having staff trained across a number of roles in the business tells the buyer that the business can “run itself”.

4.     Hide The Weaknesses

Every business has its weaknesses – and trying to hide them from prospective buyers is futile.   It simply tells the buyer you don’t know what you’re doing, and they are more likely to offer a lower price and bargain you down, than offer a premium.  

Instead, show how these weaknesses can be turned into opportunities with the right buyer and that you have plans in place to deal with them.

5.     Poorly Maintained Assets

Whilst the obvious determinant of a business value is future cash flows, a second important factor is the state of the business assets.   Are they poorly maintained or unreliable?   Does the business appear run down and shabby?

Spending large amounts on asset upgrade or replacement will not always increase the sale price, but making the assets look presentable, in good condition and reliable is important in being able to justify future growth in cash flows.

Put simply the value of the assets must be able to be reflected in cash flows either now or in the future.

6.     Untidy Business and Workplace

Regardless of the nature of your business, keeping a clean and tidy workplace will always help the sale process.   Other than improve productivity and safety, it also makes the buyer feel comfortable that the business is well-run.   It is not just a fresh coat of paint, but making sure workplaces are free of clutter, are well organised and operating effectively helps convey the impression of a smooth operation and gives the buyer confidence that they can continue to operate the business.

7.     No Professional Advice

Having no professional advice means the sale process will run blind and more than likely you will have little control over the negotiations.   Whilst this will depend on the nature of the business, at the very least a business owner should seek advice from their accountant BEFORE selling the business.   Of most critical importance is to get expert advice on the taxation implications after the sale.

Ideally a sales team should include the business accountant, solicitor, broker and business advisor.   In some cases a private or trade sale or management-buy-in will not require a business broker.   But having a skilled team is essential in getting the right result.   In many cases a business advisor can assist in managing the sale process and bring in the required specialist skills.

Avoiding the seven deadly sins will help add value to the final sale price of your business, as well as speed up the process.   It is all about the business owner controlling the process and allowing the prospective buyer to see the real value in the business.

But there are other things that can also be done to specifically add value to the business.

What Next? 

Buying a business is rarely an impulse or “on the spot” decision.   Getting a quick sale usually means giving up value that could be in your bank account.   The key message in this is to BE PREPARED!

The first step is to understand what the value of your business is now and where the profits are generated.   Knowing this allows you to develop plans to increase the value and to structure the business to make the value crystal clear.  

It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.

Executed properly, this can take up to two years before you are really ready to sell.   But the increase in value can be many times over if done correctly.   And that could mean having enough funds to buy into your next business or retire in comfort, rather than scratching around for your next job.

Maxell Consulting has helped many businesses identify the value in their business and develop plans to crystallise that value.   We offer a free initial consultation to discuss your plans and review what potential value exists within your business.
What Next? 

Buying a business is rarely an impulse or “on the spot” decision.   Getting a quick sale usually means giving up value that could be in your bank account.   The key message in this is to BE PREPARED!

The first step is to understand what the value of your business is now and where the profits are generated.   Knowing this allows you to develop plans to increase the value and to structure the business to make the value crystal clear.  

It is more than just window dressing – it needs to be real change in the business performance – it is performance that justifies the price the buyer will pay.

Executed properly, this can take up to two years before you are really ready to sell.   But the increase in value can be many times over if done correctly.   And that could mean having enough funds to buy into your next business or retire in comfort, rather than scratching around for your next job.

Maxell Consulting has helped many businesses identify the value in their business and empower the owners to develop plans to crystallise that value.  

We offer a free assessment of your situation and review what potential value exists within your business.