Selling Your Business — Common Misconceptions
Many years of deals are the basis for the collective industry experience of the Tsetserra team. Many deals flowed smoothly, while others fell through. We learn from the good and bad experiences. Searching for the right buyer takes time, and sellers often have misconceptions about the process. Avoiding the following issues will increase the likelihood of a successful outcome.
No Two Transactions are the Same
Businesses are vastly different from each other. Two companies in the same industry may generate cash flows in completely different ways. It is important to remember that no buyer has seen everything there is to see. No seller completely understands the entire selling process either. Both parties in a transaction must remain transparent, available, open, and willing to take on risks.
Once the Transaction Closes, You Need to Maintain Some Involvement
Many small business owners assume that once the deal closes their involvement and outstanding performance interests are complete. In most business acquisitions, a third party holds a percentage of proceeds in escrow for some time. This period exists to allow for the resolution and discovery of undisclosed information that may negatively impact the success of the business in the future.
Electing to finance the sale of a business over time demonstrates your faith in its ability to create cash flow in the future. Electing to take a large lump sum upon the sale, may imply a lack of confidence in the growth and continued cash flow of the business. Do you believe it will be profitable and grow for the next five years? If you do, it makes sense to be patient. Financing the sale of a business requires more patience, but it saves the seller money via taxes and increases buyer confidence.
The entire transaction is a long process that requires careful planning before and after the sale.
Hiring a Business Advisor Does Not Diminish Your Level of Involvement
It is a common misconception that hiring a business advisor or business broker will make the sales process easier for the seller. While these individuals will make certain aspects easier, the seller of the business retains most of the responsibility for selling the business. Whether or not a business owner decides on this, it is very unlikely to be a “turn-key” process with the owner still needing to work on projects to put the business in the best position to sell.
For example, the seller will need to organize phone calls and meetings with CPAs and lawyers. They will need to collect a variety of records necessary to the due diligence process, remain accessible throughout the entirety of the due diligence process, and even help train new management. Ultimately, hiring an advisor or broker does not remove these responsibilities.
Comparisons Can Be Misleading
The market for buying and selling businesses changes rapidly. Many times, owners that are considering selling their business will compare among their mentors and friends that previously sold their business. While it makes sense to consult as many sources as possible to create an informed idea of what to look for, these comparisons can be misleading. There are a lot of nuances that go into a fair market value of a business, and the due diligence process often takes months to complete. If a friend has received a valuation that is more valuable than you might expect, this valuation is more than likely well deserved based on several factors that may not be readily apparent. When selling your business, there is value in reaching out to those who have completed the process before you, but bear in mind that this comparison can hinder the sale of your business due to creating an expectation that is too high.
At Tsetserra Growth Partners, we pride ourselves on being responsible and transparent business partners throughout the sale—and the years thereafter. We recognize that former owners care immensely about the fate of their business, and we take this into account throughout the entirety of the process. If you are interested in learning more about the process of selling your business, check out more information here.