35 Common Mistakes When Selling A Business

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	Ian Benson   01904 673880   ibenson@matrixmergers.co.uk

Preparing To Sell

	Certainties
	Because household name companies regularly get taken over sellers assume that most small businesses will also one day change hands. In fact many small businesses simply close down without finding buyers. Sellers whose businesses are marketed widely stand a far better chance of gaining a sale but few small businesses are ever absolutely guaranteed a sale.

	No Interest Likely
	Some owners do not believe that anyone would ever buy their business because it is too small, too specialised or insufficiently profitable. Few businesses are so genuinely specialised that a talented manager from elsewhere would not understand them. Buyers may well bring skills, resources or technologies that can turn round an unprofitable business.

	Timing
	Sellers underestimate the timeframe to sell a business. 6 to 18 months is more likely than 2 months. 3 to 5 years is not unheard of. The marketplace of buyers changes every few months. One off buyers enter, buy and leave. Regular buyers may be busy integrating another purchase. A business which is marketed over a longer period has many more chances to find a buyer.

	Not In Control
	Business owners are used to being in control and making things happen. No one can force a buyer to purchase a business. All a seller can do is offer their business to all the appropriate buyers, answer their queries professionally and keep their fingers crossed. Sellers have to adjust to the fact that they are embarking on a project over which they have no control.

	No Plan B
	Sellers should always have a Plan B for what they are going to do if no buyer can be found. Back up plans often delegate more and simplify the business so that a 50 hour a week struggle is turned into a pleasant 25 hour a week semi retirement job. The Plan B way of operating may well make the business more attractive to a buyer than some overly complex way of operating.

	Going Too Fast
	The owner of a business with a steady trading history decides to go all out to boost sales before offering the business for sale. By the time a suitable buyer is interested sales are back at usual levels. Instead of appearing a solid, steady business it looks like a roller coaster very possibly heading towards terminal decline. Sellers should only build up businesses in sustainable ways.

Valuations

There are two ways to look at a business. How much money does it make each year for an owner who works full time in the business. Multiply that 2 to 3 times. How much money does it make each year if the owner employs a manager and does nothing. Multiply that 4 to 6 times. Some buyers are looking to buy a job whilst others are seeking a hands off investment. Two businesses could both generate £20K profit after paying for a manager. One of the businesses can find a manager for £20K whilst the other would need to pay £80K. Both businesses would be worth the same to an investor but the second one would be worth a lot more to a hands-on owner.

Marketing The Business

	Facts Not Puff
	Buyers are generally well versed in the industry and are looking for facts not adjectives and hyperbole. All statements made by sellers have to be verifiable. Buyers will assume that the business is run to normal industry standards. If sellers claim their standards are higher buyers will want verification and an explanation as to whether the attendant increased costs are justified.

	Business Descriptions
	Buyers often consult with colleagues, advisers, relatives and others. If a seller has a 1 page A4 summary of all the key facts there is a chance that all the buyer’s circle might read it. They will not read 25 pages. It is more important to have a smaller amount of information that can be easily and regularly updated than prepare some 25 page monstrosity that is quickly out of date.

	Accounts
	Formal accounts for the last 3 years should be available. A list of expenses can be enclosed with an explanation that a buyer might not choose to incur them. Management accounts for the period after the end of the last set of formal accounts should be available. Trying to sell a business based purely on accounts that are a year or more out of date is a big mistake.

	Tenacity
	Sellers often give up far too easily. They would fire a salesperson who made 5 phone calls and held 1 meeting before concluding that it was all a waste of time. By contrast when it comes to selling their business that is precisely what many sellers do. When we are marketing a business we expect to contact over 5,000 firms a dozen times each before drawing any conclusions.

	Who Buyers Are
	Sellers assume that likely buyers will be household names or similar sized local firms. In reality this is rarely so. Local rivals probably do not want to buy and do not have the money. The really big firms probably did all their rival buying 10 or 20 years ago. Medium sized out of area buyers from adjacent sectors will often be far keener to pay a good price to gain access to a new market.

	Why Buyers Buy
	Sellers assume that a buyer will have the same motivations in buying a business that they had when they founded the business. This is rarely the case. Sellers have to listen to the buyer’s reasons for purchase and relate the information they disclose to the buyer’s needs not to their own.

	Discounting
	Offering a business cheaply rarely advances a sale. What is needed is to find a firm or individual who genuinely wishes to run the business. Reducing the price from £1M to £1 does not transform someone who has no interest into a determined buyer. All that happens is that when a serious buyer does emerge they only pay a fraction of what they would have been prepared to pay.

	Already Have A Buyer
	Talking to only one buyer allows that buyer to suggest an unduly low price on unreasonable terms. Having multiple interested parties who know there are other interested parties means that buyers have to make their very best offers right from the start otherwise they risk losing out.

Discussions With Buyers

	Confidentiality Agreements
	A confidentiality agreement is a document which prospective buyers must sign before receiving the identity, details and figures of a business for sale. It obliges the buyer not to abuse the information they receive to the detriment of the business for sale. Holding discussions with prospective buyers without signed confidentiality agreements is a big mistake which sellers often make.

	Responding To Queries
	Most questions from prospective buyers should be answered within 24 hours. If more detailed explanations or figures are required sellers should respond with an initial answer in 24 hours and an exact date for the remaining responses. If sellers ignore a buyer for more than a day or two they will assume the seller is in talks with another buyer or is not serious about selling.

	Trying Too Hard
	It is rarely possible to talk a professional business buyer into buying a business that they are fundamentally not keen about. Serious buyers will drive forward the process of sale, ask the right questions and set a timetable for the deal to be done. Anyone not doing those things is not a serious buyer and sellers are making a mistake wasting time or money on them.

	Fake Sellers
	The great dread for serious business buyers is the insincere seller. These are owners who love the attention and the curiosity value of who is interested but have no serious intention of selling. It is vital that sellers demonstrate their sincerity to buyers early on through openness, prompt responses and credible reasons for wanting to sell.

	Mood Swings
	All business owners have good and bad days or very possibly good and bad months. It is important, but not necessarily easy, for sellers not to let those short term factors affect their confidence in the price they are seeking to achieve. Sellers have to try to take a long term view and not let everyday ups and downs affect their progress towards a sale.

	Thinking Buyers Are Idiots
	At some stage buyers have to check that they have not misunderstood anything about the business. Asking basic questions like “Do you call the customers or do they call you ?“ is something they need to go through. Concluding, hinting or, even worse, telling them that they are idiots who don’t understand business is not a good strategy.

	Buyer's Talents
	Whilst buyers might occasionally have some ingenious ways of boosting sales they will almost certainly have a whole raft of ingenious ways to reduce costs. Rather than telling buyers what they could do to boost sales it may be better to focus on where costs might be reduced.

	Indispensable
	Some owners like to be indispensable to their business, retaining control of key stages and keeping everything in their head. The truth is that a good staff handbook and some index cards would allow most people to run the business. This attitude is not helpful to gaining a sale.

	Mars And Venus
	In my experience men and women run businesses differently. Even in industries with large numbers of female business owners most buyers tend to be men. It is important for sellers to be alert to these differences when discussing their business with potential buyers.

	Tribes
	A business run by sales people will be different to one run by engineers. It can be useful for a seller to consider what tribe they belong to and what tribe the buyer belongs to. This may allow useful points to be brought out about how the business could be further developed in the future.

	Not A Job Interview
	Buyers want to identify things they can improve in a business they buy. Hearing that the seller knows nothing about IT and spends more time at the golf club than the office is more likely to make a buyer keen than put them off. In many ways selling a business is the opposite of a job interview.

	Falling Out
	Buyers will happily buy from people they rate as incompetent but they rarely buy from people they dislike. It is the buyer’s job to understand precisely what has been achieved and what remains to be exploited by a business. It is not easy to do this but sellers have to try to separate themselves from the business and not get angry or insulted by frank discussions.

Doing The Deal

	Giving It Away
	An offer means nothing without a full set of terms. A seller may think they have agreed a £1M offer but if the contract says £50K upfront plus a share of profits generated they are selling out for £50K plus a vague promise. Sellers should always aim for a straight sale and be wary of earn out deals.

	Three Steps
	Sellers should try to enforce the distinction between 1) Providing information to allow a buyer to make an offer. 2) Providing information to allow due diligence to verify that figures provided are genuine. 3) Post sale provision of know how about how those sales are brought about.

	Taxation
	A key thing is to avoid all the proceeds going into a ltd company. Getting large sums back out of a ltd company can incur huge tax bills. There are a number of ways of structuring a deal to legally avoid unnecessary tax. Carefully thinking through the tax position of potential deals is a vital step.

	Accountancy Fees
	A seller has to be very careful about just when to involve an accountant and how to control their fees. Putting a potential buyer’s finance director directly in touch with the seller’s accountant and telling them both to spreadsheet away to their hearts content could prove breathtakingly expensive.

	Legal Fees
	It is not obligatory to involve a lawyer when selling a business. Smaller sales are often done with an informal contract. Agree a comprehensive heads of agreement, allow the buyer’s lawyer to turn that into a contract and read through it carefully. Only consult your lawyer on specific points. Don’t put your lawyer in touch with the other lawyer and never ever start arguing via both solicitors.

	Good Contracts
	Sellers only need a really good contract in place if they are entering into a deal which places a lot of trust in the buyer. A simple deal needs hardly anything on paper other than for tax. The seller should be questioning why they are entering into such a complex deal and asking if they tried hard enough to find another buyer who might just have bought them out in full and waved goodbye.

	Lost In Translation
	An owner sells their business to a medium sized firm and agree a payment on results in 3 years time. 2 years later the buyer sells everything to a huge company who reorganise the entire business. At the end of year 3 the original owner turns up at the huge company only to find that no one has a clue where the remains of their business now lie. Simple deals avoid problems later on.

Going It Alone

	No Broker
	One buyer had a tactic of mentioning their 150 previous purchases and saying that the seller need not worry about the details. It is a difficult and lonely place selling a business for the first time with no one to turn to for advice about what is normal practice. Good business brokers can fill that role as well as market the business far more thoroughly than most owners are able to do.