How to sell your business successfully? Learn 7 mistakes you are likely to make when valuating and selling your company

Krzysztof CIESIELSKI
M&A and Corporate Advisory Director at RSM Poland
 

Selling a company tends to be a long process that takes a couple of months. In practice, it starts much earlier than the actual negotiations with the buyer. That is when the business owner can make mistakes that will cost them dearly. What are these traps and how can they be avoided?

Even the most experienced entrepreneurs find selling a company to be truly challenging. That is why it is a good idea to learn the milestones of this process. Find out how the sale proceeds and what role a business broker who can be hired to do the job will play.

What to do when selling your business?

Every process aimed at finalising a business sale is complex. However, it can be broken down into three basic stages:

• Stage 1 – preparing the business for sale,
• Stage 2 – marketing and collecting bids,
• Stage 3 – negotiations and closing the transaction.

The key word when selling your business is “strategy”. Without it, do not count on any happy ending to your story. First, it is essential to determine the most fundamental things, e.g., are you selling the entire organisation or maybe just some of your shares and you want to keep your position on the management board?

Structuring your business sale is extremely important as you must remember that selling your business does not necessarily mean that it is the very end of your presence in the company. This decision may be particularly important from the perspective of someone who was involved in founding the company and has helped it grow over the years.

The transaction structure has its tax implications, as well. The business broker is going to make sure that the transaction is as tax-efficient as possible for the seller, or actually the owner, because at the end of the day it is always a natural person that is involved.

Preparing your business for sale

Stage one, preparing your business for sale, includes the following:

• business valuation;
• making a list of potential buyers;
• preparing materials for a preliminary information exchange between the parties, i.e., a teaser and a Confidential Information Memorandum, presenting attractive aspects of the company.

Marketing and collecting bids

Stage two of any business sale involves meetings with interested parties: collecting initial bids or letters of intent. A crucial task here is to tell serious offers from false inquiries from companies that, under the guise of being interested, only want to obtain some confidential details about their competition.

This is also a time for a careful analysis of next steps and effective preparation for the negotiation stage, e.g. through preliminary meetings of the business broker and the interested parties.

Negotiations and transaction closing

Stage three involves advanced meetings with buyers, professional preparation of the data room for the purpose of due diligence, drafting the contents of the investment contract, proper negotiations concerning its terms and conditions, taking in particular the transaction value and the pricing method, and last but not least, the final step, namely signing the bill of sale, into account.

What is the support from a business broker in the process of selling your company?

Your emotional and financial commitment clearly does not help when selling your business. Even the most successful business leaders may have difficulties when a decision is made to sell the company. That is why entrepreneurs tend to rely on business broker services from early on.

Professionals can guarantee much more than just a professional business valuation or preparing the company for due diligence, as they can offer their support at the negotiation table, i.e., at the most crucial moment. Their expertise covering all the stages of a business sale helps them set an optimal pace for the transaction, while keeping a healthy, distanced approach.

Quite often we come across situations where owners who want to sell their business are not really familiar with the practice of such transactions. Knowing the process and the rules that govern it is actually very important. Having the knowledge and experience helps you prepare for the sale properly. It also builds the right negotiating position and enables to determine the role of the process participants the right way. We often experience situations where these roles are reversed, with the buyer trying to dictate the pace of work or exert some kind of pressure on the seller. And it is the seller who should be the leading party here, after all. The knowledge and experience, namely the transactional know-how, allow for a quick and effective response to any turbulence in the sale process. The lack of these competences can be costly and result in the company being sold at a price lower than the price that could have been agreed on had the process been carried out with the support of an experienced broker. Therefore, the support of a business broker may prove invaluable. What is more, a good business broker has a big network of contacts, and this surely facilitates effective identification of potential buyers.

You can rely on the services of a business broker at any stage of your business sale or just in order to complete a specific task, irrespective of the size of the company being sold. However, the most effective cooperation is end-to-end, from the beginning to the very end of the transaction. This approach is recommended by RSM Poland professionals, as well. The seller can save quite some time on preparations, looking for interested entities and, most of all, on negotiations.

With professional support, the selling party becomes a professional negotiation partner in the eyes of the buyer. The seller can appoint business brokers to handle the entire business negotiations, as they have both the expertise, e.g. in the field of legal regulations, and soft skills, extremely useful during such talks. After all, each party wants to work out such terms and conditions that will be good for them, and finding a middle ground can be very difficult.

Business valuation and due diligence: are they necessary for selling your business?

One of the key elements of the business sale process is the price, namely the transaction value. Usually, when the seller meets with the buyer there are two different amounts on the table, and in the course of negotiations they become the amount that is eventually indicated in the bill of sale.

It is not uncommon for owners to see their companies through rose-coloured glasses, setting their business value well above the actual and achievable market price. It is not surprising, however, because they tend to treat their companies in a special way, approaching them with great sentiment. This is a common mistake that actually ends the transaction before it even started. Appointing a business broker is important, as it allows you to take a hard look on the value of your company, with due consideration for the market perspective and prospective buyers. You need to remember, though, that even if you have arrived at a reasonable price that has been determined in a reliable way, but you do not know how to go through the negotiation process, this price may go down if you crack under the negotiation pressure skilfully applied by the buyer. At the same time, it is good to know that the process of price determination and how the price is structured and settled are slightly different from what we are used to and how we perceive the price on a daily basis. In the transaction practice, there are different mechanisms for price determination and settlement, and it is a good idea to learn what they are and what effects they may have.

The owner of a company should move on to talks once the preliminary business valuation has been made. This involves many elements, including:

• fixed assets,
• human resources,
• specialised machines,
• location,
• experience and expertise of the staff,
• brand value.

This is where problems tend to emerge, because such things as staff expertise or brand value escape clear-cut measurements and valuations. It takes a thorough market and competition analysis that can only be provided by professional business brokers.

On the other side of the negotiating table there is a prospective buyer who wants to carefully check if the deal is going to pay off. The tool for looking into the company you are interested in buying is due diligence, namely a detailed analysis of the most important aspects of the business operations, such as financial standing or legal security, etc.

Prepare for the negotiations properly

Hardly anyone wants to take over an organisation that is in debt or relies on outdated equipment. The business owner should properly prepare for the presentation, e.g. by furnishing any missing documents or paying any financial liabilities.

The more transparent the company’s situation is, the more attractive it appears for investors. Please note that for some of them acquisition is the basis of their growth strategy, which means they are looking to acquire businesses with a specific profile.

Often, the buyer decides to analyse the company’s historical data on their own, thus verifying business profitability and potential. This is known as a preliminary due diligence. You should prepare for this properly, e.g. by appointing business brokers who can look into the organisation and point out any shortcomings in the way you have prepared your business for sale before a prospective buyer inspects your documents.

A business broker has some valuable experience in handling emergency situations, e.g. when any errors or shortcomings from the company’s past are revealed at any stage of the selling process. He can quickly assess the threat, take the initiative and present a plausible solution, thus keeping control over the progress of your negotiations.

Top 7 mistakes made by entrepreneurs who want to sell their business

You cannot expect that the company owner or CEO who delivers effective management and contributes to business growth is going to find their way with no problems in the later details of the sale transactions. It is a good idea to know the most common mistakes made in this process, even if you are appointing a professional to do the negotiations for you.

• Being unprepared: the process of selling a business can even take up to 12 months. Both the company owner and staff should be ready for a strong effort in the transaction, involving, for example, preparing the company for an in-depth legal, financial or tax analysis.
• Not learning the ropes: knowledge is power and you may always lose if you do not have it. Suffice it to say that if the seller does not know that a Non-Disclosure Agreement must be prepared for the buyer, they may get in serious trouble. Therefore, the greater is the role of an external consultant who will not only handle the essential legal aspects, but also make the entire process proceed smoothly.
• Being unaware of how much effort it takes to sell a company: some entrepreneurs are completely unaware of how the selling process actually proceeds and how much work they will have to do in their company before they cease to be the owner. As a result, it may take longer to find people interested in buying the company and your bargaining power in the negotiations may be weaker.
• Setting the sale price way too high: this mistake is usually caused by two things; the first one is too much involvement and overestimating their own work on part of the seller, and the second is the lack of understanding of the current market situation. You must remember here that if you underestimate your business value, it may have financial consequences.
• Not preparing the data room and details for due diligence properly: the buyer needs time and space to prepare for the transaction. They often invest a lot of energy in this process, so you have to respect that and provide the right conditions for them to act. If you make mistakes when preparing your documents, the buyer may no longer consider you a credible partner and find you unprofessional.
• Not appointing business brokers for the sale process: acting on your own can very often be disastrous, because the company owner and staff may overlook things that are crucial for making the deal successful, as they may consider them irrelevant. They usually do not have any experience in handling such transactions, as well. What is more, if the owner and staff get involved in the time-consuming process of selling the business, they may neglect daily business operations or cause the company’s financial situation to deteriorate. That is why outsourcing proves essential if you want to come out a winner.
• Failing to negotiate the terms and conditions of the bill of sale effectively: this has already been discussed earlier. It is a good idea to rely on the experience of professionals who can set the right pace to your talks and know when is the best time to rush or even finish negotiations once a good deal is on the table.

The catalogue of mistakes resulting from being unaware of how the process of selling a business proceeds is wide. Each of these mistakes may materially affect the final price, which is always the driver in selling the company for the seller and every seller wants to get the best price. Not everyone is good at everything. If the seller is not experienced in such processes, they must assess whether it would not be better to ask for assistance from someone who has been involved in such transactions on a regular basis. You may try to avoid mistakes in transactions or at least minimise the risk of making mistakes to a great extent. Especially in the case of entrepreneurs who are about to carry out this transaction for the first time in their life, it is essential to avoid the mistake of not hiring a business broker. Why is this so? Well, it is because with the support of a business broker the risk of making other mistakes is reduced to the lowest possible level. If you compare a company you have built over the years to a child you are attentive to every moment since it is born, it seems clear that as a parent you have to provide this child with the best possible care at all stages of its life, in particular when it comes to the key ones.

Business owners who are considering selling the company can experience a lot of pitfalls on the way. Knowing the rules governing the sale process, as well as the hazards and the most common mistakes in the negotiations will help you secure the smooth progress of the transaction and may be decisive for the final success of the entire deal.

It is exactly the assistance of experienced consultants that will help you avoid protracted negotiations, financial losses or situations where the buyer steps back from the transaction. With professional guidance you can be certain that both the price and the final deal will be a success for you.