The Top 5 Things to Avoid When Selling Your Small Business

Although most small business sellers don’t expect the sale of a company to be easy, many are surprised by how difficult it is to sell their business at a fair price within a reasonable timeframe.

For those who want to maximize their sale and execute a smooth transition, it’s important to understand what should and shouldn’t be done leading up to the big day. There are some real deal killers you need to avoid when it comes time to sell your business.

Did you know that only 20% of businesses that are listed for sale actually end up successfully changing hands? Additionally, half of all business sales agreed upon between a buyer and seller fall through during the due diligence.

When selling your business, you need to put yourself in the best position possible. You may have the statistics stacked against you, but if you prepare appropriately and take the necessary steps, you’re sure to close the deal!

There are plenty of things to consider when selling a business, but here are five big problems to avoid. 

1. Disorganized or Outdated Records

There are many ways how outdated or disorganized records can ruin your business sale. Most commonly, they can lead to an incomplete balance sheet or inventory list, which makes it impossible for the prospective buyer to verify information.

If you have outdated company financial records, you will also be unable to provide accurate data that proves profitability and cash flow. This makes it difficult for a buyer to determine whether your company is a good investment or not.

Many deals fall through due to prior mismanagement of record-keeping. Do yourself a favor and make sure all your financials, inventory lists, and other important records are well-kept and ready to be audited before the sale of your business. Enlist the help of a certified bookkeeper if needed, and prepare for far in advance, even if you don’t plan to sell for several years.

The more organized your business records are, the easier it will be to attract potential buyers. Good record-keeping ensures that you will have all the information you require for negotiations with buyers during the sale of a company.

2. Outstanding Liens

When a company is being sold, the buyer may conduct a due diligence inspection to ensure there are no outstanding liens or debts on the company. If there are, they can prove problematic and halt the deal. 

In most cases, if there are any unidentified liens on a company, they will be listed in the disclosure as required by law before you can sell your company. As a seller, you need to be aware of all debt the company has and the plan to pay it off.

Even if you have paid off your loan, sometimes the creditor has yet to release the applicable lien. It can often take up to 60 days (or more in some cases) for the lien to be released, and this is often a deal breaker in the sale of a business. Learn the status of your lien before you move to sell. 

An unreleased lien is a liability because the buyer can’t be entirely sure that the creditor is fully paid. Most liens will follow the assets they were borrowed against – making it a concern for a business buyer. 

3. Loose or Unwritten Contracts 

A lack of legally binding, written agreements can quickly kill the sale of a business. An oral agreement might feel good, but it leaves the door open for anyone to easily walk away without warning. That’s dangerous for both sides.

A written and legally binding agreement should be made and cover topics like…

  • The purchase price
  • What is included in the sale
  • What happens if someone exits the sale

An experienced business broker will help with the details when signing an agreement or contract. Business brokers specialize in handling contracts and negotiations, and they’ll ensure you’re protected if a party changes their mind. 

A business broker will work with the two parties to develop a contract that both sides are satisfied with, then help negotiate any issues that arise.

4. Unprotected Intellectual Property 

Before you sell your business, you must protect your patents, trademarks, copyrights, and trade secrets. These are all worth a lot of money, and if they aren’t protected, they could easily kill a deal – or put you at risk of intellectual property theft.

Every business sale transaction should involve a due diligence list from the buyer, which will include intellectual property requests.

When it comes to intellectual property mistakes that ruin business sales, the issues tend to fall into two categories: ownership and control.

In many cases, a buyer will walk if the intellectual property is not properly protected or owned. Even if everything is well-protected, buyers may still be wary if a company’s intellectual property that has been shared with other parties. 

To avoid potential intellectual property issues, make sure that your logos, copyrights, trademarks, etc. are all owned, filed, and properlyprotected. You should also have a comprehensive NDA signed by any potential seller who views your intellectual property. 

5. Unsubstantiated Pricing 

Lastly, we highly recommend steering clear of listing your business at an inaccurate or unsupported price. Over-priced listings can prove to be the kiss of death for a business sale.

Beyond causing distrust between the business and its potential buyers, excessively high list prices can dramatically slow the sale process and make it difficult to find an interested buyer down the road, even when the price comes down.

It’s easy for a small business owner to develop unrealistic expectations when selling their business. Maybe they feel that all that hard work they put into the company warrants a higher ticket price, or perhaps a bad business broker got their hopes up with inaccurate estimations.

It’s important to be grounded with an accurate and fair valuation. That’s why we recommend getting your business valued with industry-proven valuation methods.

The market value will be determined by the company’s financial information and data from the past three years. A proper valuation process includes: 

  • Assessing the company’s financial performance
  • Reviewing its financial statements
  • Examining its current position in the marketplace

A good business broker will help value your business by looking at the physical assets, intangible assets, liabilities, and equity. They also look at the management team and the industry trends to understand what is happening in your particular industry. This puts you in a prime position to maximized your leverage in negotiations. 

In Conclusion 

When selling your business, you want to take the necessary steps to increase your sale price while ensuring a smooth transition. Take the time to understand what should and shouldn’t be done leading up to the sale of your business, and seek the help of an experienced business broke – it will go a long way. 

Chris Smith is a business broker who has been in the industry for over 16 years. He helps clients prepare to sell their business by providing them with guidance and advice on all aspects of the process, from deciding if selling is the right choice to preparing the business for sale and finding buyers.

Contact Chris today to get your business valued and discover the best steps forward.