Small companies are changing hands at a brisk pace in the business-for-sale marketplace. Yet, some owners are still finding it difficult to close deals -- not because of external factors like rate hikes or economic conditions, but because of self-inflicted mistakes that send buyers running for the hills.
Common Seller Mistakes in the Current Market
The business-for-sale market follows the basic principles of supply and demand. The best listings, those offering the most attractive business opportunities, receive the most attention from buyers and are able to command the highest sale prices. So as a seller, it's your job to know the market and accurately communicate your company's value to prospective buyers.
Unfortunately, that can be trickier than it sounds, especially for first-time sellers. The most common mistakes that experts are seeing in today's market nearly all boil down to either mismatched expectations or an inability to demonstrate value to buyers.
Mistake #1: Incomplete or Inaccurate Financial Data
One of the most common mistakes sellers make is a failure to support the asking price with financial data. Although many factors influence the decision to acquire a company, business buyers are generally data driven -- they need to see solid numbers before they commit time and capital to a new venture.
Accurate financial records communicate trust to potential buyers. If you have not kept good records, you simply are not ready to list your company. Your first step will be to get your financial records in order, and then prepare reports that can be easily digested by prospective buyers and other stakeholders in the process.
At a minimum, plan to provide at least three years of tax returns and earnings statements. You will also need to prepare an accurate balance sheet and cash flow report, as well as an inventory of assets.
Mistake #2: Overpricing the Business
Small business sellers frequently believe their companies are worth more than actual market value. The tendency to overprice a business is even more prevalent among sellers who built their companies from the ground up. Even though your business may seem like a member of the family, buyers determine value based on cold, hard facts like earnings and the value of tangible assets -- not sentimentality.
According to Michigan-based business broker, Kevin Vandenboss, many current sellers are falling into the trap of inflating the value of their companies as a negotiating tactic.
"The number one mistake I've seen small business sellers make is to start out asking too much for the businesses," Vandenboss said. "Almost all of them have had the same logic; 'We should ask for more so we have room to negotiate.' Unfortunately, that logic doesn't work. When you ask for too much, many buyers don't even stop to look. List your business for a fair price, and stay firm. If it's priced right, you don't need room to negotiate. When small business owners ask too much, they are wasting time and eventually get to a point where they are desperate to sell and end up taking less than they could have gotten otherwise."
Mistake #3: Emotional Decision Making
The sale of a business can be a personal milestone as a well as a professional one. But while a certain amount of emotions may be inevitable, it's a mistake to let your emotions or other personal factors interfere with sound decision making.
"The biggest mistake I observe with my clients who are trying to buy or sell a business is allowing their emotions to get in the way," said Valerie Koenig, peer advisory group facilitator for The Alternative Board Hawaii. "I once saw a seller refuse to consider negotiations, because he simply didn't like the buyer's personality. Often, in negotiating price, personal experiences can take over all reason, as in one case where a client couldn't make a compromise because his daughter's upcoming university bill was weighing too heavily on his mind."
The presence of a broker or other third party insulates your sale from emotional decision making. An experienced broker can not only serve as a sounding board, but can also provide a reality check when your emotions jeopardize your sales goals or overshadow market realities.
In truth, there are countless mistakes you can make when selling a small business. For example, you can waste a lot of time and effort on tire kickers by failing to pre-qualify prospective buyers. And in some industries, a failure to keep the sale confidential can panic customers or employees and send the business into a tail spin.
But in general, the best advice for small business sellers is to develop a sale strategy and focus on the fundamentals: Identify your sale goals, invest adequate time in preparing your business for the market, and know when it's time to enlist the help of qualified third parties.