Most business owners that decide to sell have never sold a business in the past. This sale is arguably the most important of your career, and what follows, are the top five exit strategy mistakes as observed by Xcllusive Business Brokers.
Myth #1: “Find the price you’re happy with, then double it to leave room for negotiation”
This myth is responsible for countless businesses selling for well below their value or worse- not selling at all. What may seem like a very clever negotiation technique in actuality becomes a very effective method of pricing oneself out of the market. Consider this example- Your business has been valued at $500,000. You place it on the market at $1,000,000. What happens next?
Firstly, the buyers who are looking at businesses that are worth $500,000 won’t be looking at your business because it’s well above their price range. Secondly, the buyers who are looking for businesses worth $1,000,000 WILL look at your business, but will quickly see that it is horrendously overpriced, and move onto another business. Thirdly, after a period of usually about six months, you will slowly be forced to drop your business back down to its original valuation of $500,000 which is what you should have received in the first place. By this stage, the buyers will have seen your business HALVE IN VALUE whilst on the market, and will justifiably think that there is something wrong. Finally, you will be forced to sell the business for something between $300-$400k; a great deal less than it is actually worth, because the buyers confidence in your businesses apparent plummeting value doesn’t allow for much more. In the end, it’s a choice between selling it quickly for what it’s worth, and selling it for considerably less than it’s worth after close to nine months on the market. This scenario makes it sound like we’re just trying to scare you, but we see it time and time again.
Myth #2: “Businesses constantly sell for many times their real value- well over the price that the owner was willing to accept”
This one stems from the human tendency to buy on emotion rather than logic. Yes it’s true that occasionally we will indulge and look at that article of clothing that’s a little above our budget. The same is true for cars, TV’s, furniture, even houses, BUT, the likely-hood of somebody indulging on what is a fairly substantial investment- like a business, is slim to none. When buying a business people will always carefully examine, evaluate and compare every tiny facet of their potential investment. For the most part, they wont even make a purchasing decision without acquiring external advice. They, their solicitors and their accountants will be far too busy gauging the business risks and benefits to even think about making an emotional purchase. The potential for big losses and the extended timeframe of the buying process means that an emotional purchase is highly unlikely.
Myth #3: “Keep problems with the business to yourself, the buyers probably won’t find out.”
This myth is dangerous for two reasons. Firstly, if you don’t disclose the problems from the very beginning, it is almost guaranteed that as the buyer delves deeper into the buying process, and follows through with due diligence, any issues will be discovered. From here, one of two things can happen- either the potential buyer is lost completely, or you will be drawn back to the negotiating table to substantially discount the final figure.
The second reason could be even more damaging. If the buyer doesn’t discover the issue during the business investigation process, and suffers a loss due to an undisclosed issue, the business seller could be liable. It’s important to remember that the legal consequences and financial losses at this point are often substantial.
In the end, disclosing all issues and future known business difficulties will increase your credibility as a seller and aid you considerably during negotiations.
Myth #4: “I don’t need to prepare anything, if buyers like my business, they’ll buy it”
At Xcllusive, we ran a survey of businesses on offer on the market and found that, amazingly only two out of ten businesses had some sort of sales information prepared for potential purchasers.
On the other side of that, when asked, buyers expressed that their number one complaint was that they were not able to get enough information from sellers. What buyers want, is an in depth understanding of the business so as to instantly assess their level of interest in the business on offer. Without such available information many are not prepared to make any purchasing decisions. In fact, many buyers have had the experience of finding a business that they wanted, but not proceeding with the sale because the seller made it difficult to acquire all the information needed to asses the opportunity.
Myth #5: “Buyers wont get access to any documents, and be given only limited information until they’ve paid a non-refundable deposit.”
This common mistake stems from the genuine fear that the confidential information will leak out, and as a consequence they could loose customers, employees, or the business altogether. Though it is important to be careful regarding to whom you disclose information and how you go about it in order to protect your asset, the fact is that people need to understand your business in order to pay money for it. It’s unrealistic to expect people to pay a non-refundable deposit prior to receiving any important information. When it comes down to it- would you?
To summarise- if you wish to be successful in selling your business–
• Ignore the misconceptions and hearsay you may hear from acquaintances.
• Get good advice from professionals.
• Prepare yourself and your business.
• Price your business realistically.
• Be prepared to reveal some business secrets to potential buyers.
And most importantly, employ a good team to help you throughout the process.
By Zoran Sarabaca
Principal Xcllusive Business Brokers Sydney
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