Selling your company can be daunting, especially when you have invested your blood, sweat, tears, and time to build it.
And if you’re in the United States, the experience could be pretty intense, considering the highly competitive environment for mergers and acquisitions (M&A), a sector in which the country accounts for more than 50% of global transaction values.
So, how can you navigate this complex, saturated market to make your business stand out? At Paramax, we’ve helped hundreds of business owners with successful transition strategies, and we can confidently tell you that understanding the process is essential for a profitable, smooth sale.
Read on to learn our ten key considerations when selling a business, including tips to embrace and common mistakes to avoid.
Making the Most of Your Business Sale (Dos)
While the process of selling your company can seem challenging, there are several steps you can take as a business owner to maximize the value of your sale and ensure a seamless transition. In this section, let’s dive into the things you can do to ensure you and your business are positioned for success.
1. Be Overprepared
Private companies often take a reactive approach when planning their exit strategy. In fact, 58% of small business owners lack a succession plan.
The reason could be because they’re overwhelmed with daily operational demands, think their exit is too far into the future, or feel too attached to let go of the company. Regardless of the underlying reason, the absence of a transition plan can eventually become problematic, particularly when it’s time to step away from the company.
If you foresee selling your company at any point in the future, start preparing years in advance. Doing so gives you sufficient time to clean up financial records, set right any vulnerabilities within the business, complete a due diligence sell-side fire drill, and improve the company overall.
These steps will ensure that when the day for sale gets here, your company is set up for success.
2. Value Your Business Accurately
A business’s value is fundamentally tied to its profitability. However, other factors, such as growth opportunities, customer loyalty, and brand recognition, are crucial in closing a deal.
A business sale can be a significant transaction. So, depending on the business size, you may need to get professionals involved to ensure the company isn’t undervalued or overvalued. Here’s why: an undervaluation can lead to losses or missed opportunities, while an overvaluation can deter potential buyers from expressing interest in the deal.
As the US Chamber of Commerce notes, “A formal business valuation may be necessary when seeking investments or loans.”
While online calculators can give you a rough estimate of your business’ worth, a professional opinion will be more reliable—for example, a member of the American Society of Appraisers. Alternatively, an M&A valuation from a firm like Paramax can help you get accurate insights and handle the entire sale process from start to finish.
3. Lean on Experts
A business sale requires the expertise of various stakeholders, such as finance, legal affairs, compliance, mergers and acquisitions, and business development, to name a few.
While the business owner undoubtedly has the most in-depth understanding of the company, navigating the complexities of a sale demands specialized knowledge. The cost of making a mistake is too large—usually costlier than hiring these experts—and there’s no coming back.
This is where a knowledgeable M&A advisor can make all the difference.
“[M&A advisory firms] act as intermediaries between the buyers and sellers and provide expert advice and guidance throughout the entire M&A process, from the initial assessment of the transaction to the final negotiations and closing of the deal,” says Tru Tamplin in Finance Strategists. “They help their clients to identify potential targets, evaluate the target’s financial and operational strengths and weaknesses, and negotiate the best possible deal terms.”
Research reputed M&A advisories in your area to guide you on your journey so you make the most of your decision to sell.
4. Be Transparent With Buyers
Your business is your legacy. As much as you want to maximize profits from the sale, being financially transparent can go a long way in helping you get there.
You will earn your potential buyer’s trust and confidence and give them the incentive to look after your interests post-sale, whether that’s your customers or employees. You also won’t have to worry about deals falling apart at the last minute due to surprises or failure to disclose information.
Moreover, if the deal goes through and a buyer uncovers information not shared previously, you’re opening yourself up to a lawsuit.
5. Build Wealth Post-Sale
The business you’ve spent years building has allowed you to flourish and move on to the next adventure. However, with increased wealth, it’s essential to strategize how to manage it effectively to ensure continued growth and security.
As stated in an article by Morgan Stanley, “Your finances will likely look different after you sell your business. Such a significant windfall means you may have more cash at your disposal to invest. Additionally, you may have continued personal financial exposure to your business, such as receiving payments based on the company’s future performance or investing some proceeds back into the business.”
Seeking expert advice can be invaluable in making your money work for you in areas such as:
- Investment and retirement planning
- Wealth transfer planning
- Insurance planning
- Asset, cash flow, and debt management
- Income tax planning and compliance
- Educational funding
For example, exploring options like living trusts, enhancing life insurance coverage, establishing powers of attorney, and considering health care proxies can be pivotal. Additionally, consider the benefits of setting up a philanthropic foundation or an educational savings plan to secure the future of your loved ones.
“Of course, the plan will look different for each entrepreneur. It’s important to clearly define your goals and objectives, and having an intentional, iterative dialogue with your trusted advisors who are well qualified to help you through these important, often irrevocable decisions,” the article continues.
Business Sale Blunders to Avoid (Don’ts)
While there are best practices for business owners to follow when selling their business, many still make common mistakes. Keep reading to learn about these mistakes and why you should avoid them.
6. Avoid Having Unrealistic Expectations
Hearing about the profits other businesses have made from their sales can be tempting, but also misleading. For instance, if a competitor sold their company for a high price, you might expect the same for yours. However, a business sale involves many nuances, including profitability, market, customer base, team size, infrastructure, and other assets and liabilities.
So, be cognizant of the fact that your company’s value might not align with another’s, and that news reports rarely provide the intricate details that shape a deal. This will help prevent you from harboring inflated expectations that can detract from your company’s appeal to buyers and potentially delay the sale.
7. Don’t Get Overinvolved
Business owners often get too closely involved in the transition process, which can lead to a loss of objectivity. This challenge is amplified if they manage the sale by themselves, taking on the heavy responsibility.
But being overinvolved can hinder the process. Instead, focus your energy where it matters, offering industry and business expertise to prospective buyers to facilitate a seamless transition. The solution? Rely on experts like Paramax to guide you, from identifying potential buyers and due diligence to closing the deal.
Remember that you’ll have the final say in the sale, but that doesn’t mean you need to get into the weeds.
8. Neglecting Ongoing Operations Is a Mistake
In your search for the perfect deal, don’t neglect ongoing operations. Selling a business is often lengthy, and your company needs to look attractive to potential buyers until the deal is closed.
If your daily operations suffer, that may impact the business valuation—that’s the last thing you want to deal with when you’re in the middle of the selling process. Ideally, you want to control the decision when you sell the company and be in the best position to negotiate when you make that call.
For example, ensure your processes are efficient, payments to vendors are made on time, and taxes are filed correctly to emphasize compliance and fair practices. The best way to get there? Plan your transition strategy years before you intend to sell. This gives you sufficient time to ensure your operations, market share, and revenue are in a great place.
9. Confidentiality Is Key
Confidentiality is critical to any merger or acquisition process, regardless of the company size. Think about it: employees might get nervous about their careers when they hear about a possible acquisition. Additionally, if word about the sale spreads, competitors can take market share away by spreading the news to your customers.
All these factors not only cause chaos but affect your bottom line. So keep the decision to sell among a trusted few—usually your leadership team and M&A advisors.
10. Going Solo Can Be Costly
Most importantly, avoid selling your business alone. As mentioned, being too close to the process can cloud your judgment. Handling the sale independently also puts you at a disadvantage during negotiations, particularly when you don’t have the expertise to establish a baseline.
Without this knowledge, you might end up settling for an offer far less than your business’s value or expecting a price beyond your reach. Either way, you lose and don’t get the best outcome for you or your business. So, going it alone can do more harm than good.
Navigate Your Business Sale With Confidence
Paramax has a proven, five-phase process for sell-side transactions that prioritizes the sellers’ best interests. We source strategically selected buyers globally to ensure you receive the best offers, maximizing the value of your sale. For more information, feel free to contact us.