Most entrepreneurs eventually get around to thinking about selling their businesses, whether as a prelude to retirement or to pursue other activities. In doing so, they often underestimate the effort required for a satisfactory outcome and as a result, they overestimate the value and salability of their enterprises.
Why do the vast majority of business owners think their business is worth more than it is?
Valuations are often complex and multi-faceted. Owners often fail to consider major components of a company valuation. A conservative estimate would be that 50% of small- to medium-size business owners haven’t considered the tax implications, and approximately 75% of owners overvalue a company by not calculating in bank repayments.
If you’re contemplating selling, here are some common mistakes to avoid:
1. Overestimating the value of your business.
With owners reporting that 80-90% of their wealth is tied up in their businesses, it’s no wonder that the number one question I receive is “How Much is My Business Worth?”
Your price should be based on the fair market value of the business in its current form. Buyers won’t care about the work you’ve put into building the business or your unique vision for its future.
2. Failing to account for the nature and make-up of your business.
The values of most businesses proceed from a mixture of variables. If your business includes significant equipment, real estate, intellectual property or other such assets, those values should be separately established before being factored into the overall price. If you’re selling a service or professional firm, much of its value may depend on the experience and skills of your managers and employees. In such a case, the price may vary according to the expected retention of key individuals.
3. Failing to base your sale price upon independent appraisals.
Even if you think you know the value of your business, you should obtain two or more outside appraisals from professionals familiar with your industry. If the appraisals conflict with your opinion, they’ll provide a much-needed reality check. If they confirm your opinion, they’ll become a useful sales tool.
4. Not hiring a professional business broker to handle the sale.
Owners are often too personally invested (and/or eager to sell) to effectively negotiate sales of their businesses. A broker familiar with your type of business will know what issues are important to buyers and what characteristics to emphasize or de-emphasize, without becoming emotionally involved.
5. Neglecting to work with the buyer to ensure a smooth transition.
Nobody likes being thrust into unfamiliar circumstances without preparation. Notifying your managers, employees, and customers in advance and doing all you can to allay their concerns will serve your own best interests, as well as being the honorable thing to do. Discontent on the part of any of the affected parties could result in conflicts, reduced revenue for the buyer, withheld sale payments and litigation.
6. Being unwilling to help finance the sale.
If you’re unwilling to take back a note, your sale price is limited to the buyer’s cash and ability to obtain outside financing. At best this could limit the number of potential buyers, and at worst it could limit your sale proceeds. (Conversely, if you finance too much of the sale price, it can increase the risk of default.)
Do You Know How Much Your Business is Worth, Really?
This undertaking is likely the reason why only one-third of business owners say they are ready and positioned to exit. There are a lot of tough issues that will need to be addressed throughout this process. Business, personal, legal, financial and tax issues need to be evaluated. A qualified team (CPA, accredited valuation expert and wealth advisor) can help design a plan, maximize profit and minimize tax implications to enhance and protect your money, as well as make the best decisions when it comes to your business.
Interested in getting started?
Sikich offers a complimentary meeting with business owners, and their spouses, to identify business and retirement goals as a first step in the business succession planning process. Start now and prosper later.
For more information, contact:
Ray Lampner, CPA, ABV, CVA, CFF, CGMA, CEPA
Partner, Business Succession Planning