John Warrillow, the author of Built To Sell: Turn Your Business Into One You Can Sell, knows about selling businesses: He has started and exited four companies. His new book is a compact and essential guide to anyone who plans to sell their business. Suggestion: buy the book a couple of years before you plan to sell, because you have a lot more work to do than you realize.
Warrillow put together this handy tip sheet on the top five mistakes to avoid when trying to sell your business.
1. Thinking the acquirer will help you hit your earn out
When you get an offer to buy your business, there will likely be some money paid at closing and a second tranche of cash paid if you hit certain milestones in the future. Most professional acquirers will want you to accept some or all of your proceeds in an earn out and will make a strong case for all of the resources they will give you to help you hit your numbers. After your deal closes, you may be disappointed by the level of support the acquiring company offers to help you hit your nut.
2. Thinking a term sheet is a binding offer
When you get an offer to buy your business, it will likely be a non-binding letter of intent or term sheet. In return for signing it back, you typically have to give the potential buyer exclusivity to do their due diligence. Diligence often uncovers things that makes the buyer uncomfortable and triggers them to drop the price they are offering you or to walk altogether. When you get an offer, avoid taking the check to the bank in your mind -- there are still many things that could derail your deal.
3. Not creating competition for your business
Anyone who has sold a house knows you get the best price when you get a bidding war going for your home. The same is true when selling a business. The key is to get multiple offers for your business and the best way to get more than one offer is to hire an M&A firm to represent you in the deal. Their job is to create competitive tension for your business by getting more than one buyer to make an offer and running a professional sale process.
4. Running little luxuries through your business
Most business owners run some expenses through their company that could arguably be called perks (fancy hotel rooms, expensive meals, a nice car). Strip these luxuries out of your business before you put your company on the market as each expense will be magnified when you close a deal. For example, if you hope to get five times pre-tax profit for your business and you run a $4 coffee through your company, that coffee will end up costing you $20 ($4 x 5= $20) in lost proceeds from the sale of your business.
5. Getting lawyers to do your dirty work
Some owners try to hide behind their lawyer asking them to pound the table for better deal terms. Using your lawyer as a foil can often create a distrustful relationship with a buyer and may make some buyers walk altogether. Instead, take a page out of Warren Buffet's playbook and write down the deal terms in plain English and come to an agreement before ushering in the lawyers.