Business owners typically reach the point where they are looking to retire or have had sufficient amount of running their own business and are looking for new opportunities. Listed below are the seven common mistakes business owners may make when selling their business.
You haven’t thought enough about how you’re getting paid
Business owners almost always have an idea what their business is worth, and it’s usually based on some formula they’ve either heard about or developed on their own over the years. What owners often fail to consider is how dramatically that price can differ based on the means of payment. An all cash at closing sale should bring a different price than, for instance, an installment sale over a term of years, or payment based on future revenues or profits of the new owner. Most owners dramatically underestimate the effective discount they are giving buyers when the terms don’t involve 100% cash up front.
You haven’t thought enough about what happens if you aren’t paid
Successful business people tend to think positively and assume success. A great quality to have when running a business, to be sure, but often it blinds owners to what can, and often will, go wrong in a sale scenario. What if your buyer stops making installment payments? Can you repossess the business (and do you want to)? What if they’ve severely impaired the value of the business through mismanagement? Created unknown liabilities, such as potential employee lawsuits, that you don’t want to assume the risk for? Even if you have an absolute right to repossession, your optimistic nature may be keeping you from acknowledging the risks that remain.
You haven’t been creative enough
Every business transaction is different, and nearly every possible transaction offers creative ways to generate more value, often for both sides. Staying on as an employee and teaching the buyer how to run the business is a classic example of creating a win-win value proposition, but there are always more. The business may lend itself to creating residual income through royalties. You may wish to retain a small ownership stake if you believe the company may be on the verge of great things under new leadership. It might make sense to structure the purchase price with a contingency based on the short-term performance of the company post-sale to build confidence for the buyer, and increase the overall value of the transaction.
You haven’t considered the tax implications thoroughly
It is not uncommon for business owners, especially small business owners, to count the number of months they’ve owned a business, determine whether they will owe short-term or long-term capital gains taxes on the proceeds, and end their tax considerations there. There are a variety of strategies available to defer taxation altogether, and a good tax strategy can often be more significant to your bottom line than the sales price.
You haven’t been realistic about your buyer
For any number of reasons, you may be blind to the obvious red flags about your buyer, or mistakenly think they don’t matter. They always matter. There is no adequate legal remedy for doing business with unethical people and businesses. No lawyer, no contract, and no down payment of any size can offer you complete protection. Due your due diligence on your buyer, and not just their financial health but their business history. People and businesses involved in numerous lawsuits should be avoided at all costs. You don’t want to be the next entry on the list. Even large companies vary greatly in reputation for keeping to the terms of their business commitments. Don’t assume that any company, large or small, is “okay.”
You haven’t sought legal or financial advice because it’s too expensive.
One thing nearly all successful small businesses have in common is a focus on the bottom line, and often that means watching expenses like a hawk. This is often counterproductive with professional services, especially when you’re selling a business. The sale of every business could benefit from the insight of a good business lawyer. While there are certainly some deals that are too small to justify the expense, the number of deals that fall into that category are so small you should assume yours isn’t one of them. A good transactions attorney won’t cost you money, he or she will save you money. In extreme cases, they may even keep you from making a monumental mistake.
You haven’t considered the potential risks of the transaction.
I tend to refer to this as the “unknown unknown.” These are the things you haven’t even considered as potential risks because we’re all constrained by our own imaginations. For instance, a former client of mine never imagined they would be involved in bet-the-company sized litigation when they drafted their own independent contractor agreement to pay part-time workers rather than consult an attorney. Or when they drafted a temporary lease agreement that resulted in the forfeiture of their entire company. They simply weren’t risks that were foreseeable to them when they entered these transactions. The stakes with a business sale tend to be even higher than ordinary transactions.
Don’t take anything for granted when you sell your business. Question everything, including your own biases, because they often keep you from seeing the entire picture. Almost all transactions will benefit from engaging a professional, usually an experienced attorney. Above all else, never do business with people you know are dishonest or unethical. This rule alone will help you avoid the vast majority of the risks you face in selling your business.
If you have a legal issue you need help with, the attorneys at Whitcomb, Selinsky Law PC would love to share their expertise with you. Please call (303) 543-1958.