The Top 4 Mistakes Business Owners Make Before Selling Their Company

We see it over and over again. And, when we don’t see it firsthand, we hear about it from bankers, lawyers, accountants, CPAs and wealth managers.

In every instance, the person telling the story is slowly shaking their head in mild disbelief.

So, what 4 mistakes do they repeatedly see and why are they mistakes.

1). They don’t plan for their exit

Business owners most often wake up one morning, usually burnt out or just tired and decide it’s time to sell. Right now. Not a year, two or even optimally 3 years from now. But, right now.

Case in point. A banker tells the story of a business owner and client who walked into the bank one day and said he’d quit. Closed up shop. The banker was stunned. There had been no notice or previous conversation on the subject. The owner extracted no value from his company. Worse, the banker located a competitor who would willingly buy the company so he called the owner within just days of hearing the news. The owner told him it was too late. He’d called all his clients and told them he was done.

2). They run their company for tax purposes

It makes perfect sense to run a company for tax purposes if you plan to own it for many years to come. Business owners typically flush all expenses through the company that they can to legally minimize profits for tax purposes. When those expenses provide an enhanced lifestyle for the owner, they are often called EOB—excess owner benefit. Further, they flush through huge capital expenditures which they often expense rather than capitalize.

That’s all good. Until you want to sell. Those accounting tricks greatly damage business valuation. The multiplier effect of valuing profits multiplied by a certain number serves to greatly exaggerate the value depletion. A quarter of a million dollars in these types of expenses can cost an owner easily $1 million or more in exit value!

3). They don’t have a senior management transition plan

It’s the nature of many business owners. The company was their vision. Their sweat and blood. And, most importantly, their knowledge and customer relationships. They call the shots. All of them or darn near. They are either the only or the most critical point of contact with customers. And, there’s no number two. Why? They either can’t handle the idea of turning over any responsibility. Or, more often, they don’t want to pay for it.

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What they don’t understand when it’s time to sell is that buyers hate this. Consequently, one of three things happens. The potential buyer walks away because he sees too much risk. The buyer proceeds with the deal but offers a greatly discounted price to reflect the risk he’s taking on. Or, he requires the owner to stay on for a significant period of time. That, ironically, is the opposite of what the seller wants because he/she wants out. Now.

4). They don’t have a life plan

Most business owners eat, sleep and breathe their company. It’s their life. It’s a 24X7 thing. Further, for many, it’s also a factor in their social status and ego validation. Their work gives their life real meaning. And, the demands allow for little time to develop hobbies, outside interests and a non-business-related social structure.

Ultimately, they’ve given little or no thought to what life will be like post sale of their company. All they can see is that they are burnt out, want out and they will have some cash in the bank. There’s no thought about what happens the day after the check hits the bank account.

Many become lost, disillusioned and either regret or resent their decision to have sold. They quickly realize that golf or fishing isn’t fun 5 days a week

It’s worth it on many levels to invest in planning for the future of your business and your life.

Note: If you have an interesting and/or educational CEO story of Head Noise caliber, write to me at cbishop@capitusgroup.com. I’d love to speak with you and share your story in my Head Noise blog. You can tell your story either on the record or, without attribution.

Cameron Bishop is a partner with The Capitus Group. The firm provides comprehensive business value enhancement and transition strategy solutions. Partners and Advisory Directors comprise an experienced team of business professionals who have successfully owned, run, grown and sold companies. Capitus utilizes proven value enhancement and risk reduction techniques to enable superior transition options.

 

 

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