For owners · Guide
Common mistakes owners make before a sale
These are the missteps we see most often from private business owners preparing for a sale. First, a recommendation that avoids many of them.
Our recommendation
As you prepare for a sale, have at least a one-hour meeting with each of these advisors:
- An investment banker
- A transaction attorney
- A transaction-focused accountant
- A tax attorney or CPA
- An estate planning specialist
- A wealth management advisor
In most cases these professionals will meet with you at no cost to point you toward a better result.
Not preparing early enough
Owners should start preparing for an exit as much as ten years ahead, because some issues take that long to fix. One example is failing to make an S corporation election five years before a sale, which can create structuring problems, double taxation or additional built-in gains tax. Another is a heavy concentration of customers or suppliers, which can take years to diversify.
Waiting for the top
The best time to sell is often when the business is doing well, problems are few and markets are healthy. That is also when selling feels hardest. Many owners are optimists who believe next year will be even better, until something unforeseen hits: a recession, the loss of a major customer, supplier or key manager, an accident, litigation or a health issue. Leaving some growth for the buyer also helps the price, because buyers can see how they will profit.
Start early enough to exit when you want to. If the likely buyer is a private equity firm, it may buy 50% to 80% of the business at first and ask you to stay three to seven years to help grow it. If you are 55 and want to be completely out by 60, you may need to start a transaction at 54: about a year to complete the deal, plus five years running the business. Partial sales like these suit owners who are not ready to retire. You take some chips off the table and get a second bite at the apple when the company is sold again.
Underinvesting in accounting
Buyers want information, and lots of it, before they buy. Many private companies have not invested enough in financial and reporting systems, a professional accountant on staff or qualified outside auditors. Failing to produce the right information quickly can kill a deal.
Most buyers want at least one year, and often several years, of audited statements. Audits are expensive, but there is a cheaper option: have your outside accountant perform year-end procedures every year, such as receivable and payable cut-offs and inventory test counts. That lets a review be upgraded to an audit when you sell. A pre-sale quality of earnings report from a qualified accounting firm is another option.
Rosy projections
Owners often make aggressive projections to get the highest price. But in many sales the owner stays with the business and has to live with those projections. They should be the most likely case, somewhere between the best case and the worst.
Above all, don’t miss your numbers during the sale. A single miss breaks the trend line, scares buyers, and is the most common reason prices fall or deals die. It also damages your credibility with a buyer you may be working for after closing.
Running the business differently
Just before or during a sale, some owners accelerate collections, take extraordinary dividends, slow payments to vendors, cut inventory purchases or skip necessary capital spending. Sophisticated buyers will usually find these in diligence. That hurts the price and the deal, and it costs you the trust a deal depends on. Run your business as you normally would.
Starting without professional help
Strategic buyers and private equity firms are aggressive about calling private companies, asking for financial information and making early offers that cut off competition. Owners sometimes say or do something that lowers the value of the business, or narrows their options, without realizing it. By the time we are called in, some of that damage can no longer be undone.