6 Common Mistakes Business Owners Make When Trying to Sell Their Companies
You want to sell your company. You're ready to retire, or move on to the next venture. How do you prepare your company for sale? Six common mistakes business owners make when trying to sell their companies are:
1. Not Knowing Your Industry's Standards - You don't want to find out after you've decided to sell that your company's working capital ratios, customer diversity, or average aging accounts receivables, are below industry standards. Better to know your the typical ratios and discover your weaknesses in advance, so you can reverse these into neutrals or strengths.
2. Holding Your Company's Assets in Less-Effective Legal Structures - I've met many owners who've made the mistake of holding their real estate in and through their Corporation. Others have made the mistake of owning their business in and through a C-corp when an S-corp (or visa-versa) would have served them better from either a tax-strategy standpoint, or in courting the ideal buyer upon exiting.
3. Improper Accounting Practices (Small & Easy Fixes) - Improper accounting practices are the number-one deal-killer. A common and sometimes minor issue is improperly accounting for certain expenses. For example, giving customers rebates upon delivery and then mistakenly accounting for the difference between the original sales price and the actual deliver price as a bad-debt write off. Doing so would make any novice buyer mistakenly assume the company has too much bad debt as a percentage of sales.
4. Improper Accounting Practices (Big & Nasty Problems) - Some accounting practices like those above are easy to fix. Others are deal-killers for almost any buyer. For example, it was recently discovered during due diligence that one of the businesses we had an offer on had unreported income to the I.R.S. of close to $2,000,000 per year for the past several years. Unlike tax avoidance using the maximum deductions allowable, some owners practice tax evasion by not reporting the income they've earned. The former if prudently applied will make you wealthy. The latter will almost certainly cost you more than you ever thought you saved and will likely put you in jail.
5. Unreported Off-Balance-Sheet Liabilities - Not all liabilities or potential liabilities show up on the balance sheet. For example, as a buyer I've found during due diligence that some companies have over-billed on government contracts. In another case a seller was liable for damages connected to a breached contract that occurred some time ago, but hadn't yet converted to formal litigation. In this case the statute of limitations for the breach of contract is 6 years, and so the off-balance sheet risk is a liability that must be factored in until the 6 years has run its course.
6. Waiting for Mr. Right - The perfect buyer or the perfect price and terms, are like the perfect spouse: they're a myth. One owner I know has been wanting to sell and retire for many years, but is still "married" to a price offered to him years ago, from a prospective buyer who has long-since lost interest and recently passed away. Since then, the business continues to deteriorate in value because the owner isn't emotionally committed. He wants to sell but is unwilling to settle for a fair price based upon today's valuation. When your heart is not in your business, time is your enemy. Waiting for the perfect buyer, or waiting for a better offer when you have a fair and reasonable offer on the table, is a mistake that has cost many businesses their entire nest egg.