Common Business Buy/Sell Mistakes
Sure, it's great to learn from your mistakes, but it's even better to learn from the mistakes of others, so you don't have to make them yourself. We've compiled a list of the kinds of mistakes that we see business buyers and sellers make, all too often. Here's a few of our er, favorites. Check back often: people keep making mistakes so we'll keep updating these lists:
Common Buyer Mistakes
It's Only About Money, Right?
It is said that cash is the language of business transactions. There are even popular slogans like, "When someone says it's not about money, it means it's about money." Money is an important element of a business acquisition to both buyer and seller. However, it's a mistake to assume that the amount of money is the only important consideration for a business seller, or even that it is the most important consideration. Most business sellers are very much concerned about other factors like their legacy and their independence.
Insulting Seller Right from the Start
Chances are good that a business that you are considering for acquisition was started years ago by its current owner. Or perhaps the current owner bought it from the founder and built it to what it is today. In either case, the prospective seller lived and breathed that business, struggled to make it work, likely putting in 70 or 80 hour weeks for at least some period of time while building it. He probably knows how to run that business very well.
That being the case, it's remarkable to us how often a prospective buyer will tour a business, ask the seller a few questions, and then start offering what he believes is great advice that the seller should appreciate. "Gee, what you need is an updated website," or "You should have these products manufactured in China," or other well-meaning advice that insults the seller. Why is the seller insulted? Put yourself in his position: suppose he toured your company or your department and after 10 or 15 minutes told you how you could do your job better. You too would consider him to be, at best, somewhat presumptuous.
It's easy to unintentionally insult a prospective business seller, and doing so will certainly get you off on the wrong foot. Remember, the seller is looking for a positive home for the business he built as well as a good relationship with the new owner of his company. Be respectful of the seller's sensitivities. If you have ideas as to how to improve his business, note them down and save them for use later.
I'll Bet The Seller Will Be Really Impressed with the Size of My Company
This one applies to companies buying companies:
Most small business owners subscribe to a value system that respects entrepreneurial achievement more than established size and stability. Talking about how big or how well established your company is, probably won't impress. You'll be more likely to establish a rapport with a seller if you talk more about your firm's entrepreneurial roots and how you encourage entrepreneurial thinking than about how big your company is.
These are My Terms...
Buyers and sellers alike tend to set strict parameters right from the start. We can't count the number of times a seller has told us he will only consider an all cash deal, or that a prospective buyer will only look at companies with EBITDA that is at least 10% of gross revenue. The problem is that good opportunities are few and far between, and they don't always fit preset parameters. The stricter your upfront limitations, the less likely you are to find a doable deal.
Buying and selling a business is a complex transaction. A lot of needs have to be satisfied on both sides for a deal to happen. This is why intermediaries need to have a whole range of tools to make an acquisition happen. If both sides can be flexible, some of these tools like earn-outs, issuance of preferred stock, and many other solutions can be brought into play to bridge seemingly unbridgeable gaps.
Common Seller Mistakes
Not Preparing One's Company for Sale
Too many would-be business sellers wait until the last minute to plan the sale of their businesses. The complexities of the process and the fact that preparations are necessary dictate that advance planning is crucial to getting the best possible price for the business' sale.
The same business owner who spends hours and hours of research before buying a new piece of business equipment for say, $20,000 will spend a mere fraction of that time on preparing for the sale of his or her business; a much larger and more important transaction.
A few advance modifications to business practices can go a very long way toward a successful business sale. See the section Preparing Your Company for Sale.
An All Cash Deal is Always the Best Deal
A lot of business sellers initially insists on 100% cash upon closing the deal. This may sound like a prudent strategy. In reality, though, owner financing is the magic that makes a lot of business deals happen that would otherwise fall through. The vast majority of deals include some amount of owner financing, often between 15% to 40%.
From the buyer's perspective, owner financing is very attractive because
- it is easier to obtain than traditional bank financing
- it is a bit cheaper than bank financing
- it provides some assurances to the buyer that the seller is not trying to put one over on the buyer or planning to leave the buyer in the lurch after the sale.
Seller financing has advantages for sellers too:
- increases the likelihood that there will be a sale.
- Payments over time can be structured (by your accountant) so it will save on taxes or at least spread the tax liability over a number of years
- You may well get a higher price for your company with owner financing than without it.
- When we're confronted with a company seller who insists on all cash we ask: Which would you prefer: $1 million in cash or $800,000 in cash and $300,000 over 3 years with interest from a financially capable buyer. There is no right or wrong answer, but it does get the seller thinking about his "all cash at close" policy.
Letting Emotions Rule over Rationality
Selling a business that you have spent years of hard work building can be an emotionally wrenching experience. To some, it is almost as emotionally difficult as putting one's child up for adoption. To buyers, brokers, and others involved in the buy/sell process, it is a cold and rational process.
Do the best you can to keep your emotions out of the process. This, of course, is easier said than done. For this reason alone, a good intermediary can be helpful. Part of his or her job is to make the discussions as comfortable as possible for both buyer and seller.
Pricing the Company Wrong
Business valuation is a mix of art and science. Ultimately, a business is worth what a buyer will pay for it. There are all sorts of simplistic and inaccurate rules of thumb out there, and there are a lot of people willing to offer well meaning but uninformed advice. Price your business way too high, and you'll scare away would be buyers who would offer a reasonable price. Price it too low, and you'll leave money on the table.
If you are considering the sale of your company now of in the near future, it's a good idea to get a qualified independent opinion on the value of your company. We offer a very reasonable priced business valuation service
We focus on (but do not entirely limit to) companies with sales in the $1MM to $20MM range located in the New England States: MA, CT, NH, RI, VT, ME.
If any of our M&A services fit your needs, please feel free to contact us for a free consultation without obligations or sales pressure. Fill out this simple form or call us (401-751-3320)
