How To… Avoid the pitfalls

In this second part of our How to... guide to succession planning, Charlie Cleary looks at some of the common mistakes people make when deciding to sell their business - and how to avoid them.

You’ve spent over 30 years building your business, the children have their own professional careers and you decide it’s time to sell the business and retire. So far so good. But a number of businesses that go on the market for sale never complete a transaction or sell for much less than planned by the retiring owner.

Of course, external factors such as the economy or credit markets can impact transaction results, but in most cases what impacts success or failure is under the direct control of the seller. Proper planning and preparation will avoid costly mistakes when selling your business.

Here’s a look at the most common mistakes that occur when selling a business – and what to do to prevent them.

Not knowing what your business is worth

When it’s time to sell your house, you contact an estate agent to get an appraisal on your home. So likewise, when you are ready to sell your business, you need to have a professional valuation done. Unfortunately, the value of your business is not necessarily the amount of money you need to comfortably retire. Ultimately, your business is worth what a buyer is willing to pay for it. Establishing a valuation range based on similar-size market transactions and then finding the right buyer are essential to success.

Not having an advisory team when it’s time to sell

You’ll need an advisor for your business valuation and deal negotiations, an accountant for tax planning and digesting the numbers, and a lawyer who has worked with an asset purchase agreement. Don’t make the costly mistake of saving money when selling your business by not hiring a team of professional consultants. Your advisory team will help you sell your largest asset and protect your financial future.

Not communicating with family and key managers

It’s important to understand that buyers are acquiring sales as well as people. Making sure that a key person or two are excited to stay on board to lead the integration and retention of sales will increase the value of your business. Whether this is a family member or key manager, this can only happen with careful planning and confidential communication. 

The key manager needs to know that he/she is an integral part to the post-transaction sale and future of the business, and that an employment agreement with the buyer will provide job security and new opportunities. Additionally, even if you don’t have family in your business, communicate with your immediate family during the selling process for support throughout the challenging selling cycle. If they know what you’re doing, family can provide moral support throughout the inevitable ups and downs of selling a business.

Not keeping it confidential

It is essential that outside of family only you and a key person or two in your organisation know of your intention to sell and they must keep it confidential. An agreement with your key manager, advisors and potential buyers is essential to maintain confidentiality throughout the process. 

Avoid the risk of employees learning of your intention to sell the business and resigning, because that may reduce the value of your company and the purchase price. You also increase the value of your business having non-compete/non-solicitation agreements in place with sales representatives, customer service people and drivers.

Not finding the perfect buyer for your business

Beauty is in the eye of the beholder and finding the perfect buyer that sees nothing but synergies in your business will obtain the highest selling price. It might be eliminating a competitor in a market, acquiring a much-needed and highly capable sales manager or obtaining the system platform upgrade for the next decade. Identifying the right buyers that recognsie all the synergies in your business is a critical step in marketing your company to prospective acquirers. 

Not building a complementary prospectus 

Market valuations based on closed transactions provide a range in line with the size of your dealership. The ability to close the transaction at the high end of the valuation range requires presenting your company in its most favourable light based on the criteria of the buyer. 

Key factors tend to be lack of dependence on the owner, sales growth potential, diversified customer base, system platform and market reputation. Preparing a prospectus that features synergistic value to the perfect buyer can save time in negotiations and maximise the perceived value of your company. 

Not understanding the selling process

It all begins a year before putting the business on the market and requires a plan. The selling process then starts with a business valuation, building a prospectus and identifying the perfect buyer. 

The Letter of Intent (LOI) from the buyer is followed by negotiations and then the due diligence process. The purchase agreement with further negotiations is the final big step prior to closing and integration. Despite integration being the responsibility of the buyer, being engaged, supportive, even excited for the future will assure closing the transaction and continued success for former associates. Knowing the process from start to finish saves time and money for the buyer and avoids costly mistakes that can blow up a deal.

Not preparing for the due diligence process

Due diligence occurs following the signing of the LOI and allows the buyer to dig into the financials, employees and payroll, customer performance, sales rep results, processes, integration discussion and more. The buyer is focused on future growth opportunities, risk factors and return on investment. 

Preparing the right information ahead of the selling process while maintaining confidentiality will save considerable time through due diligence. Having due diligence reports ready to be updated will eliminate disruption in your organisation, reduce employee suspicion and lead to a quicker closing. 

Not planning your next career or retirement

There’s nothing worse than a seller’s remorse or wavering when the transaction is just about to close. You start thinking about your employees, your legacy and most importantly, what it is that you are going to do next in your life. Don’t let this happen to you. Spend time well ahead of the selling process figuring out what it is you want to be or do after office products. 

Whether playing golf, sitting on the beach, reading books at home or volunteering for a good cause, try it out before making a decision. Make sure you like it and it’s what you really want to do for the next few years. You also need to make sure that you’ve saved enough money and can sell the business for the right price to live comfortably in retirement if that is what you’re after. 

It requires financial planning years ahead of selling, knowing the realistic market valuation of your business, understanding how taxes and fees impact net proceeds and identifying your future cost of living.

Like most things in life, selling your business takes a bit of planning to avoid costly mistakes and make it a reality. So if you’re thinking of selling your business in the next few years, start work on a plan to eliminate stress throughout the process and assure continued success in your next career or a happy and well-earned retirement.

Charlie Cleary is the owner of Cleary Consulting, assisting office products dealers with succession planning, buying and selling businesses and strategic planning. With over 30 years of industry experience, he understands the challenges facing independents today and helps them build strategic plans for growth through acquisition or successful exit strategies.