How does the thought of selling your business make you feel? Excited to hand over the result of years of hard work to your lucky successor? Terrified that you won’t find a buyer because your business has seen better days? Sad that it’s time to leave your team and your professional passions behind? Wistful about what might have been?
An emotional rollercoaster
Maybe you’re experiencing ALL these feelings at once – along with many more! Because if there’s one thing we’ve learned in our years as corporate finance experts (and in our previous careers as entrepreneurs), it’s that selling a business is a road paved with many emotions. The danger of this is that it can cloud your otherwise sound judgement, an ability to see things objectively and your decision-making skills – all key factors in selling a business effectively.
Over 70% of business owners fail to sell their businesses the first time, wasting money, time and effort and slowing them down on the way to realising their goal of moving on to new ventures, or retiring to spend more time with their family and on personal interests. This is stressful and demoralising – two emotions no business owner wants to feel when they should be looking forward to the next chapter of their lives.
The reason for this failure is usually that their business wasn’t ‘exit-ready’ – often because they rushed into selling a business without adequate preparation. Throw lack of groundwork and poor knowledge into the existing cauldron of emotions and you’ve got a recipe for disaster – so it’s vital to understand what your vulnerable spots are so you can remedy them before you go to market.
How to avoid the most common pitfalls when selling a business
As we say in our popular eBook ‘How to avoid the pitfalls when selling a business’, pitfalls are like pot holes – when you know where they are you can do your best to avoid them. Here’s some advice to help you do just that, so you can be one of the 30% who sells their business for optimum value, first time round…
1. Not knowing your S.P.O.F.’s (single points of failure) from your elbow. Which areas in your business are high risk and could negatively impact your business if they failed? Locate these points before going to market so you can make improvements.
- Think about your suppliers, for example. If you can only source key products or services from a single supplier, what’s your plan B if they go bust?
- What about your staff? How much would it impact your company if one of your key employees left tomorrow? Make sure all roles are documented, especially those that involve highly specialised knowledge or niche skills.
- Do you have all your eggs in one basket with your clients? Develop a business survival plan in the event that a key account switches to a competitor.
2. Having out of date contracts – or none at all. If you’re serious about selling your business, now is the time to review the situation with your contracts. During the due diligence phase of selling a business, your buyer’s lawyers will ask to thoroughly review contracts with your staff, suppliers, customers and the owner of your buildings. Make sure these documents exist and are up to date, ready for close analysis. Ask an expert to evaluate the standard of your:
- Shareholders’ Agreements
- Memorandum and Articles of Association
- Service Contracts
- Employment Contracts
- Supplier Agreements
3. Cooking the books. If you were buying a business, one of the first things you’d do is take a long, hard look at the accounts. Ensure you have accurate annual, financial, and monthly management accounting and controls in place and that you, your accountant or your Financial Director is ready to explain them with confidence to interested acquirers. Areas that may need attention as you prepare to sell your business are:
- Suppressed profits
- Undervaluing and over valuing stock and work in progress
- Undeclared cash payments to the business
- Directors’ private expenses running through the business
- A lack of, or inadequate reporting, budgeting and forecasting processes
4. Unprotected intellectual property. If you’ve built a successful brand, have a well-known logo design, or you’ve invented a unique product or process, keep it protected! Just as these valuable assets can be the first thing that entices a potential buyer into acquiring your business, they can be the things that will send them running if they’re compromised in some way. Also think about whether you are infringing someone else’s IP? Or do you have third party IP that is the lynchpin of your business. Get a full review of:
- Registered designs
- Design rights
- Trade secrets
5. The business is too dependent on you. That 70% figure we mentioned at the start of this article? A large proportion of them deter buyers because their success is too dependent on the knowledge and contacts they have as the owner. If this sounds like an issue that might affect your business, find ways to hand over key relationships and share your knowledge before you sell. Get ready to show buyers how your business has a strong future without you – prepare answers to valid questions like these:
- “What about key client relationships?”
- “Who is responsible for the sales?”
- “Who runs your operations?”
- “What about the development of new products
Entrepreneurs Hub is an approachable corporate finance company helping business owners across the UK to prepare and sell a business – the smart way. Find out more about our free seminars on preparing and selling your business for maximum value, or contact us in confidence discuss your situation, receive a guide valuation and find out how saleable your business is, why now is a good time to consider an exit.
Download the full eBook ‘How to avoid the pitfalls when selling a business’