The decision to try to sell your business is a big one. Once you've made it, business owners often make some critical errors that can reduce their company's selling price or derail the deal entirely. Keep your advisors close at hand and avoid the following pitfalls:
Telling little white lies
From your first contact with a potential purchaser, to the day the purchase and sale agreement is signed, your truthfulness is being evaluated. How you respond to the purchaser's numerous requests for information impacts how they view the future potential performance of the business and their willingness to do business with you. Sometimes you may be tempted to misrepresent or "colour" facts to avoid revealing one of your competitive advantages. You may be unwilling, for example, to reveal your product margins on major accounts until the last possible moment. So you ignore requests for this information, respond vaguely, or say that you don't collect it. This does not inspire confidence in a buyer.
To manage this risk and protect your interests, get your finance and legal professionals involved prior to releasing any information to potential purchasers and map out what you are willing and able to release at different parts of the sale process. Draft a confidentiality agreement or a letter of intent to provide increasingly harsh penalties to the potential purchaser for exiting the process at various stages or using or divulging your information, which ensures your key competitive data will not be disclosed until the last possible moment.
Ignoring the legalities
Entrepreneurs rarely have all of their legal matters up to date. If this is you, engage a corporate lawyer to finalize your shareholder agreement to minimize the risk of issues with minority shareholders. If intellectual property is involved, seek an IP lawyer to guarantee the ownership and control of the property is where the purchaser would expect it to be (buyers and their experts really hate surprises). Your choice of a lawyer for the sales process is also critical. Look for a mergers and acquisitions lawyer with experience representing sellers of your size, and your industry, who will prioritize your key concerns and protect your interests, but also respect your desire to get the deal done.
Don't underestimate the impact of personality and working style of your legal counsel—if the buyers' and sellers' lawyers can't get along, you could be setting out on a long, expensive journey to a failed deal. Ask other entrepreneurs and professionals for recommendations and interview various candidates until the experience and personality fit is there.
Lack of focus on the details
The workload from selling your business can be the equivalent to a full-time job, which comes at the same time as you are expected to perform your existing one. There will be many information demands that you may not anticipate (trust me on this—I'm often the one making the lists!). These requests can pile up and stall the process. Your own business can suffer as you are being pulled away from the helm, which will lower your sale price. To rectify, get help information gathering from staff members or external professionals who will keep the information to themselves. You can also hire contract workers that specialize in collecting, controlling and disseminating the kinds of data that sellers will be requesting—these references can come from your lawyer and business valuator.
Before any information is distributed to prospective purchasers, have a senior executive or your key advisors review it to make sure it's accurate and you have appropriate confidentiality agreements in place. Keep a record of what you send, either electronically or in binders (for quick reference). Your lawyers can able to help with the process, including setting up an electronic data room. A data room sets up a protected location accessible online, through which the seller, purchaser, and the experts can access electronic copies of the information provided. This helps to organize the information and to avoid—confusion about what has been made available.
Remember that all you've worked for is at stake. By being aware of the pitfalls, you can save yourself the heartache of leaving cash on the table or derailing a deal entirely.
Sondra Stewart is a chartered accountant and chartered business valuator, and is the owner of Stewart Business Valuations Inc. Since 1998, Sondra's efforts have been focused on business valuations and related financial advisory matters.