Common pitfalls when selling your business

There’s no one route to selling your business. Selling up with a healthy return on your investment might be the end goal of your five-year plan, or you might receive an unsolicited offer from a competitor that feels just too good to turn down.

But when you do get to the point of putting your owner-managed business on the market, what are the key things you need to get right within the process of selling and common mistakes to avoid?

In this blog we explain the importance of being a diligent owner from the start, and how good financial systems, detailed management information and a keen awareness of your market are central to getting a good price for your company.  

Are you a driven or reactive seller?

Small business owners usually fall into two distinct camps. There are owners who focus on the business idea, getting the company off the ground and making things financially stable.

And then there are owners who are already looking forward and planning for how they can sell up and make a healthy return on their investment.

Your mindset as an owner will define the type of seller you become, and the way you approach the sale of your business – depending on whether you’re a driven seller or a reactive seller. Let’s quickly explain how these two types differ:

• Driven sellers – these owners are on a mission to sell up at a profit. They have a goal, a detailed five-year plan and are focused on the end game of selling at a good price.

• Reactive sellers – these owners weren’t planning on selling up but may suddenly have received an offer, or been faced with an external event that means a quick sale is necessary (but minus the plan or any of the detailed preparation).

Sometimes your sale will be driven and well planned, and sometimes your need to sell will be reactive and based on external events, over which you have little control.  

Making your business a serious proposition

Direct and reactive sellers have very different outlooks on the sale process, and there are distinct advantages to having a longer-term outlook, where you plan and prepare for a sale.

For example, a management buyout is a great example of how a long-term outlook can add value. As a management team, you’ll have accessed funding for the initial buyout, worked to a five-year plan and set a goal. And that’s because you’re driven and motivated by the desire to go from being highly paid employees to being millionaires (hopefully!). Committed entrepreneurs understand that this is how you have to behave.

It’s a serious business where you take serious entrepreneurial risks – and you expect a reward at the end. But a large part of the small business market are reactive sellers – owners who have received an offer, or where financial, legal or other personal pressures have meant that the company needs to go on the market. So, if you are looking to sell up, what are the common pitfalls you should look to avoid?  

1.  Having robust financial systems

People may joke and call accountants the ‘bean counters’. But I don’t know of many successful businesses that have got there without good, robust accounting systems and reporting. Not having good, detailed management information is a common mistake for owners who are aiming to sell up.

If you don’t have detailed accounts, a handle on your cash flow and a good overview of your marketplace , you can’t be sure what’s going on in the business – and many business owners find that they don’t understand the financial detail of their business as well as they thought.  

2.  Carrying out the required due diligence

Appreciating what is involved in the financial, tax and legal due diligence process that any buyer will undertake is important and, potentially; educational. Owners can often learn a great deal about their business and finances by going through a “dry run” process.

Simply put, due diligence is a test of value to validate any offer made for buying the business and to build detailed information on the business. It also seeks to validate key assumptions made in any offer and therefore look for issues that would lead to a change in the offer – including valuation - and other issues that might need attention. 

It also provides an opportunity to check you have the vital, detailed, organised information that potential buyers will expect to see.

A simple example: if you cannot come up with an analysis of turnover from your biggest ten customers for the past 3 years (with explanations of variations from year to year), that’s not a positive sign! This should be something you have at your fingertips, not something that takes a week to pull together.  

3.  Understanding risk in the business

The value of the business reflects the inherent risk of the company as a proposition, so it’s vital that your assessment process also focuses on managing that risk.

Customer and supplier dependencies, key employee dependencies, technological disruption, changes to the competitive environment in your markets, and threatened changes to regulatory or legal frameworks (to name just a few) all impact the overall assessment of risk and therefore value. Having knowledge, information and an assessment of risk readily available is so important.

It suggests you’re a well-run business, and interested parties are far more likely to pay more for a company that looks professional, manages its risks, and is stable and well-organised.  

4.  Having the best advice and support

Having access to good advice adds value. A broker will just match buyers with potential sellers, but an experienced advisor gives you broader advice and a deeper level of insight, especially when they work with similar businesses.

Our first step when approaching a sale is to get to know you, and to get under the skin of your business. And that initial process is far easier when we have access to robust management information. With a good business advisor and insightful management information, your business is always well positioned to react to unexpected changes in the marketplace.

You can’t envisage everything – Brexit and its potential impact on the wider economy is a great example of this. But you can look forward and understand that we all live and trade in a changing and evolving world, not a vacuum: that is good management.

Having the ability to react to unplanned hurdles is a vital skill, helping you support and protect the value you’ve built up in the business.  

5.  Getting the best possible price

The more intimately we know your business, in the early stages before you go to market, the more meaningful our analysis and evaluation of the company’s value will be.

So, if your ambition is to achieve a certain minimum value for your business, you’ll want a sound opinion on whether that’s a realistic value, what its value might be today, and how to bridge the gap. When we know your business well, we can give you a much clearer indication of the value – and any areas where improvements could, potentially, be made.

With a bit of homework, and the right focus on adding value, you can increase what buyers are willing to pay, so you could exceed your value expectations if you put your mind to it.  

Helping to deliver the best sale

If selling up is your goal, we can help you pull together a workable strategy to refine the business, get the sale price you’re looking for and reap the rewards of your hard work.

This will mean being a diligent owner and asking yourself some tough questions. We’ll help you remedy any issues, plan a strategy and ultimately realise the true value you have locked up in your business.  

Download our free Exit Planning Handbook here: 

Talk to one of our Business Advisors about selling or preparing to sell your business.