1. Business Owners Don’t Understand the Buyers (investor’s) Motive
Buyers pay for the past but buy for the future. In other words, they pay the seller for the work the seller has done in building the business, but they won’t pay for the work the buyer will have to do to get the business to the next level. Buyers want to buy a business that has a future but they pay the seller for the past. Buyers are investors who are looking at the future for return on investment and growth potential
2. The Owners Assume the Best Investor is Local
Most sellers naturally assume that the market for their business is the immediate surrounding area. The world is now your marketplace and the best investor may be anywhere across the country, or around the world. In addition to the individual buyer, thousands of very quiet private investment groups and offshore investors are interested in acquiring profitable, U.S.-based, privately-held companies
3. Owners of the Business Don’t Understand How to Value Their Business
Most owners of closely-held businesses have suppressed profits to reduce taxes. The company's financial statements don't begin to reflect the true value of the business. The actual financial statements need to be restated to eliminate the owner's discretionary and non-recurring personal expenses. Attention also needs to be drawn to "off-balance sheet assets," tangible and intangible. Historical financial statements don't tell the real story.
4. The Owners Have an Unrealistic Price in Mind
Recent surveys indicate that few companies have a current, accurate business valuation. Half of the time owners are unrealistically high in their asking price, and the other half of the time they are low. Whether you think your business is worth $1 million or $50 million, without a professional opinion for reference, you can't begin to discuss or justify a selling price that makes sense to a buyer. Don’t leave money on the table when pricing your business!
5. The Owners Don’t Receive Proper Counsel
Talk with business owners who made an ill-fated attempt to sell their own business. Most wish they had used an experienced Business Broker /Intermediary. Without professional help they are prone to taking advice from the wrong people. Buyers are not that hard to find, but when it’s time to make the deal happen, the deal often falls apart without an experienced business intermediary.
6. Business Owners Try to Sell to the Wrong People
One of the biggest mistakes is to think that the best investor for the business is a competitor, customer, supplier, or employee. If the deal doesn't happen, and most don't, then a great deal of confidential information about your company has been disclosed. Suddenly, everybody knows more about the company's profits and operations than they should. Keep your intentions confidential unless you're ready to sell at a rock-bottom price.
7. The Company Is Not Positioned for Sale
Organization, growth opportunity, reputation, market conditions, and industry leadership are some of the many intangible qualities buyers appreciate and will pay for. Documenting improvements that could be made by a buyer/investor with new capital helps you to better position the company and increases value. There can be a swing of 50% or more in sale value if the company is solidly positioned for future growth.
8. There is Improper Financial Documentation
Investors are evaluating the purchase of the business based primarily on future growth potential and expected return on investment. Buyers want to see what the profits would have looked like if you had run the business like a public company (no co-mingling of business and personal expenses). Often this means recasting the financial statements away from the tax based accounting that has been done in the past. Buyers also find it helpful to review your three-to-five-year financial projections, backed by solid market research substantiating the future potential of the business. Simply stated . . . create a presentation to explain the past and sell the future!
9. Business Owners Don’t Plan for After the Sale
Many business owners have not thought about what their real personal financial needs will be after the sale. After debt repayment do you need a large amount of cash for other investments? If you're willing to wait for a portion of the proceeds (monthly, quarterly, yearly), the buyer has more flexibility to pay a higher price. If you insist on an "all-cash" deal, savvy investors will discount their offering price by up to 35% or more! Note, this doesn’t mean a large percentage of the deal has to be seller financed; there are ways to guarantee your payments with no risk!
10. Owners Don’t Understand How Taking Tax Deductions Now Affect Future Sales Price
Business owners tend to “write-off” expenses not associated with business activities to save on income taxes. Owners have been known to deduct expenses for things such as vacations, motor coaches, boats, airplanes, farms, personal condos, motorcycles, personal residences, hobbies, etc. These are expenses that the new owner won’t incur and may not be required to operate the business. While trying to be “tax savvy” many owners lose sight of the impact such buried expenses may have on their business’s value.
Example: an additional $30,000 in deductible expenses may mean up to $12,000 in tax savings. However, the additional non business expenses (if not properly added back to the profit) may reduce business valuations by from $60,000 to $120,000. Saving $12,000.00 now in taxes may cost you 10 times as much when you sell!
Important Note: When reviewing the records the buyer may agree and understand all of the personal or non business expenses you may have included to reduce your taxes. However, it’s the TAX RETURNS that hold the most weight with the banks and SBA when your buyer needs loans for acquisition and operating cash. In the couple years leading up to the sale—it is wise to “clean up” the profit and loss statements and pay the taxes.
