Finance

4 common mistakes business owners make when selling and how to avoid them

- February 18, 2021 4 MIN READ
selling a business

A business owner’s decision to sell can take a long time to make and be an emotional journey. There will be many contributing factors towards the eventual sale: having reached a tipping point as a solopreneur, perhaps branching out into a new venture or even retirement, writes Lachlan Grant is the CEO of Vital Addition.

Most businesses around Australia won’t (or just don’t) last forever. Businesses are bought and sold every day, and once the decision has been made, how – and when – you then go about preparing for and finalising that sale can have a huge impact on your financial future.

The process has the potential to be complex and can present lots of challenges.

Here are some of the most common mistakes business owners make when selling, and how to mitigate them.

1. Lack of preparation

Just like selling your house, you need to have your affairs in order or your potential gains may be less than expected. Timing is key, and ideally start at least two years before you list the business. This gives you plenty of time to research and gather information about the process, your strategy, and seek professional advice.

Buyers look for ongoing profitability. They want a business that runs without having to set up a whole new operation. Ensure yours is running smoothly; consider training staff to work with new owners, prepare operational and risk manuals, and ensure all your systems are in optimum working order. Similarly, the saleability and value of your business might be adversely affected by lease issues, staffing problems, and/or incomplete financial documentation.

2. Incorrect valuation of the business

Businesses consist of different assets which can have an impact on the sale price of the business. You may want to retain some of those assets; machinery, for example, or intangible assets such as intellectual property or goodwill.

You will need a range of business information to correctly value your business, including financial and legal documents, the business profile, plans, and procedures to demonstrate current markets and future forecasting, staffing records, and marketing and growth plans.

In many cases buyers will ask for an independent evaluation, so it’s essential that you have that business information in its entirety ‘at the ready’. A good accountant or business adviser will be able to help you assess your business’ value in a number of ways, including:

  • Current market value. Consider the industry you are in and look at other businesses operating in the same or similar space.
  • Business asset value. Assess the intangible and tangible assets mentioned earlier
  • Return on investment. Essentially, “is the current income from the business sustainable and ongoing?”. Analyse your current income stream and assesses risk to the income stream in the future. With the risk expressed as a percentage (ROI %), the higher the percentage, the greater risk to the income.
  • New business cost. Estimate the cost of setting up a similar business to yours in the current market, including consideration of buying stock, equipment, and tools, getting licenses and permits, hiring staff, the development of products and/or brand, marketing, and the cost of premises at the very least. This way we can determine if starting from scratch would be a cost-effective approach to a potential owner.
  • Future business profits. Demonstrate what future income will look like by using trends in your industry in the past and how the market looks moving forward.

Generally, an evaluation will employ a combination of these methods to arrive at the most accurate figure.

3. Not finding the right buyer

To sell a business, it needs to be advertised to potential buyers. To maximise exposure, it’s recommended you promote the sale through using the right channels:

  • existing networks including family, friends, employers, customers and even operators of similar businesses or competitors
  • online and traditional media
  • business brokers and/or real estate agents

States and territories have different standards and requirements about what information is required to be provided to potential buyers.

It’s advisable to engage a tax or accounting adviser to help prepare the sales document or memo (issued on request). He or she can also address common questions and include comprehensive information such as turnover and other financial information, competitors, best operating times of year, staffing overviews, detailed contractors, and suppliers.

The more accurate information you can supply, and the more potential and suitable buyers you can reach, the better possible outcome for your sale.

4. Failing handover

Many vendors are so focussed on the successful sale of their business, they drop the ball at this point. But the handover process is just as important as your sales strategy and process, and be including in your Sale of Business Agreement so both parties know what to expect and have an agreed realistic timeline.

Depending on the nature of the business, aspects such as some licensing transfers can take up to twelve months, so planning and transparency are vital.

As well as the formal requirements such as:

  • leases
  • permits
  • the finalisation of tax returns and activity statements
  • cancellation and transfers of business names and ABNs
  • plus keys and alarm codes

…a smooth transition can also benefit from some personal touches, like introducing your buyer to your most important clients and suppliers or hosting an introduction for your staff and the new owners. There may also be a stipulation in the sale that you, the vendor, remain onboard for a time for training and other operational requirements.

As mentioned, selling a business can be a long – and often drawn-out – process. Having good advisers on your side can make a world of difference to not only your experience of the process, but your bottom line.

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