06 Aug Mistakes To Avoid When Working With Buyers & Sellers
Years ago, when I first started riding bikes on long distance rides, a crafty old veteran offered me some prudent advice. “Son,” he said, “There are four things that will never help you when you ride long distances – a flat tire, long and steep hills one after another, the strong wind in your face, and the water and food that you don’t have.”
While selling a business may not involve the same hazards and hurdles as riding a bike long distances, mistakes can often be just as fatal to the desired result. So, just as the wise old bike riding veteran offered, here are five pitfalls that will trip you up every time.
A Buyer With No Money
This may seem obvious, but the fact is that many a seller have traveled down the road to a sale only to find that the buyer does not have the resources to make the deal. It’s important to understand that there are many buyers who talk a good game, but fall short when asked to pull the trigger. Relatively few buyers have the financial resources, the emotional commitment, and the business acumen to reach the closing table. The absence of either of these and you will lose both time and money.
The broker or seller must qualify the potential buyer to be assured that he/she is working with a capable prospect. With a little effort, you can verify a buyer’s assets, credit status, and closing commitment. If you find it uncomfortable to question a buyer directly about this, an experienced broker can obtain this information in a professional and diplomatic manner.
A Lawyer or CPA With No Experience
Most small business owners use small law firms and CPA’s to take care of their business matters. This is perfectly adequate for day-to-day needs. However, for selling your business, you will be well served to qualify your professional, just as you would a buyer or an employee, about their experience in actually completing seller transactions.
It is not enough to be knowledgeable in contract, mergers, acquisitions, and tax law, not enough to be familiar with cash flow, net income, and valuation methods. What is mandatory is that your attorney or CPA knows how to get the deal done! In order to serve your needs as a seller, these people need to be dealmakers, but too many times, they act as deal breakers. They need to be as interested as you are in closing the deal as they are in protecting you. Too often, inexperienced attorneys and CPA’s are more interested in legal or financial purity than they are in assisting you by closing your sale.
The result is that they provide protection for problems that have virtually no likelihood of occurring. This wastes time and money and, more importantly, tests everyone’s patience. Experienced attorneys & CPA’s with a history of successfully completed business transfers understand how to protect you while getting the deal done.
Too Many Decision Makers
How many times have you heard that too many cooks in the kitchen can spoil a good stew? The same applies in business transactions; making it a difficult problem for partnerships as well as for sole owners with family members who are involved in the transaction. The more people involved in making a decision, the lower the likelihood of any decision being made.
No two individuals have precisely the same motives and expectations when selling their businesses. When these differences are allowed to pervade the negotiations, difficulties usually arise. Emotions can run high and multiple seller emotions add a complexity that slows the process and frustrates the buyer. Both sides eventually lose interest and the deal dies.
Whenever possible, multiple sellers should agree on the broad parameters of the sale with one of them designated the prime negotiator. As long as the terms and structure of the transaction confirm to the agreed-upon standards, the designee has authority to proceed unencumbered. The likelihood of success substantially increases.
The Earnings You Don’t Have
Business owners are an optimistic lot. Were they not, they would probably never have gone into business in the first place. Inflated optimism, however, inevitably leads to inflated expectations. This becomes evident when a seller expects a buyer to pay for potential earnings. Valuing and pricing a business are complex issues that require objective, professional assistance. Rarely, though, does an analytical buyer value the potential of the business as high as an optimistic seller might.
This is one of the reasons why proper presentation is essential to a successful sale. The normal demands of business growth require that expenditures for equipment, customer development, and personnel expansion require constant attention. While necessary for future growth, these activities exact a current cost. Long-term growth always come at the price of short-term expense and reduced earnings.
Once you decide to sell, you should manage the business for maximum earnings in the year or two preceding the sale. In most cases, both sellers and buyer benefit from maximized earnings. The seller attains a higher value for the business while the buyer has greater financial strength to attract financing and to grow the business.
The Tax Return You Didn’t File
Small business owners have a legitimate desire to minimize taxes. The result is that earnings on the business tax return are also minimized. The problem here is that buyers use tax returns to establish the value of the business. As much as the seller wants to show higher earnings by adding back non-essential expense, the buying side will not recognize the higher earnings, unless those expenses are unequivocally determined to be non-essential.
This creates a dilemma. Neither the buyer nor his financial resources will rely on speculative earnings in determining the value and desirability of the business. At the same time, the seller is unwilling to reduce his/her price expectations because he/she knows the real earning power of the business. The only sure way to resolve this issue is for the seller to maximize his earnings for a year or two before sale and reflect these earnings on the business’ tax returns. Due to the price-to-earnings multiple effect inherent in business sales, the increased tax you pay will be more than compensated for by the higher sales price received.
It is certainly no surprise; you see it every day as you run your business: the more thoroughly you plan, the better you execute and the more mistakes you avoid, the more successful you will be. It’s really no difference when you sell your business.
Submitted by Richard Gadberry, BCI, CBI, CBB
Regional Developer for Murphy Business & Financial Corporation