Know When to Sell Your Business By Avoiding These 7 Mistakes

When to sell your business: It’s one of the big-three questions that most owners have, along with how much is it worth and what will I pay in taxes? The answer to when to sell your business can be elusive. There are a lot of no-answer answers out there, with “it depends” being the most common (and aggravating).

Some business owners view their business as an investment and strive to sell their most valuable asset at or close to the peak of its value. These owners understand that “buy low, sell high” applies to many things in life, including finding the key to significant liquidity from a business sale. 

Many more owners, however, answer the question of when to sell your business with a shrug of the shoulders, believing they’ll just pull the trigger on a business sale “when it feels right.”

The problem with “when it feels right” is that it may or may not coincide with the business being positioned to attract potential buyers and command a high sale price. Even worse, “when it feels right” may come at a time when it will be difficult or even impossible to sell your business.

While finding the best time to sell your business takes advanced planning and deliberate action, identifying examples of when not to sell is an easier task.

In this article, we’ll help you get clarity on when to sell your business by discussing seven scenarios when selling should probably be avoided. We’ll describe times when it can be difficult to find good buyers for your business, and when selling will result in a low valuation or an unfavorable deal structure. We’ll also offer some quick take-aways for each scenario.

Mistake #1: Selling Your Business When the Financial Statements Look Bad

The first thing prospective buyers will want to see is the financial statements of your business. Buyers typically ask to review the last three years’ profit and loss statements, balance sheets, and tax returns as a minimum requirement for putting forth an offer. And that’s just for starters. The buyer and their financial advisors will be asking for everything but the kitchen sink during the due diligence process

The numbers associated with your small business can look undesirable to buyers for a variety of reasons. Here are a few examples:

  • Sales have been inconsistent or declining year-over-year
  • Gross margins are below the average for your industry, and/or shrinking
  • Net margins are thin, and/or getting thinner
  • Accounts receivable take too long to collect, impacting cash flow
  • Major capital improvements have been put off and are now imminent
  • Too many non-business expenses are being run through the business
  • The books are disorganized, incomplete, unclear and/or take too long to update

The financial statements of your business are its foundation. The sale of your business will not get much traction when the financials are weak, or paint a bleak picture of your business’ recent performance.

There’s an old saying in the investment banker community: “If your numbers are bad, your story better be good.” The truth is, there are few excuses for poor financial results that will reassure potential buyers. If your financial statements look questionable, buyers will take a pass on your business and keep looking for a better investment of their time and money.

TAKE-AWAY: Ideally, you want to sell when your financial statements for the past three or more years look fantastic. The answer to when to sell your business is when sales are up year-over-year, gross margins are healthy, and profitability metrics are above the average for small businesses in your industry. Ironically, this is the last time small business owners will think to call a business broker to get a business valuation and start the business sale process

Mistake #2: Selling Your Business When Your Industry Is in Decline

Maybe you’ve seen the writing on the wall; technology is changing, the market is shifting, competitors are calling it quits. It can be tough to admit that the business you built is now in a declining industry. You may have stayed in the game too long out of loyalty to your customers, your employees, your original dream. 

Many business owners think that a new owner may want to tackle the challenge of pivoting to an adjacent industry, or launching new products and services to existing customers. The thought goes that maybe someone younger, with more energy, capital resources, or fresh ideas would be able to successfully navigate the next stage. 

But the truth is that most buyers want to buy a business in an industry that is either in the mature or growth phase of its lifecycle. Even if there are buyers for businesses in a declining industry, they are often savvy financial engineers – like private equity groups and strategic buyers – who will know that the value of your business is most likely declining along with the industry. Selling your regional chain of party supply stores right after the biggest industry player announced it is closing 55 locations will likely be an uphill battle.

TAKE-AWAY: Sell your business when your industry is in a growth upswing, or at a minimum in the mature stage of its lifecycle. How will you know when to sell your business in this scenario? If there is a flurry of merger and acquisition (M&A) activity – often referred to as a “frothy market” – in your industry, you’ll want to consider riding that wave. Once strategic buyers and private equity groups have snapped up the most desirable targets, M&A activity tends to dwindle … and is slow to return.

Mistake #3: Selling When You Can’t Hang On at Least Another Year

When to sell your business: stressed entrepreneur working

Business owners often sell when they’ve reached a point of extreme burnout. There’s nothing wrong or even unusual about getting tired of owning and running a small business. Regardless of what level of burnout you may be experiencing, we all know the feeling of wanting to close one chapter of life and move on to another.

The problem comes when you’re so worn down that you can hardly keep yourself from closing the doors and walking away. Selling a business, and properly preparing a business for sale, takes both time and energy. The sales process itself can take up to a year (four to six months is about average), during which time you’ll need to keep running the business — and running it hard — while you’re also working on the sale.

Oftentimes putting a year’s worth of work into the business prior to selling can help attract more buyers and support a higher valuation multiple. Even simple improvements like tidying up the financial statements, documenting processes, and freshening up your website can make a big difference. If you take a year to prepare, plus a year to sell, that’s two more years you would need to stay focused on your business.

Even after the sale, business owners typically need to stay involved during a transition period with the new owner. These post-sale transition periods average six to 12 months. So, you may not be completely free of your business for three years – from the time you start getting prepared to sell, go through the sale process, and complete a post-sale transition period.

TAKE-AWAY: I can’t tell you how many times I’ve heard owners say “we should have started this process two years ago.” And two is the magic number: Try to start the process of selling your business about two years before you want the deal to be done. Waiting until you’re fed up and want out may be too late.

Mistake #4: Selling Your Business When You’ve Lost Key People

Employee issues are one of the primary causes of business-owner burnout. Few things hurt the business, and the owner, like the gut-punch of having a senior member of your management team give notice. Or worse, watching three senior members of your management team leave and start their own company. Ugh!

This is another one of those throw-in-the-towel moments. Why not just sell the business so you never have to deal with this situation again?

Unfortunately, one of the things a buyer looks for in a business for sale is a strong layer of upper management. If there’s no management team between you, the owner, and frontline employees, it can be difficult to sell your business. In these situations, the business owner is often tied to a lengthy post-sale transition period while the new owner beefs up the team.

TAKE-AWAY: Owners of highly sellable businesses with significant transferable value have made themselves operationally irrelevant. In other words, their presence isn’t critical to running daily operations, or bringing in new customers for the business. Here’s a quick litmus test: What would happen to your business if you took a six-week vacation? If your business can’t run without you for at least four weeks, now is the time to build a deeper bench, not sell.

Mistake #5: Selling Your Business When It’s Too Small to Support a Sale

When you started your business you may have dreamed about growing it to a certain size. Maybe the goal was $10M in annual sales, or five locations, or nationwide.

In reality, scaling a business is easier said than done. In order to grow you may have to raise more money (i.e., assuming debt or diluting your equity), hire more employees, or buy more equipment. Oftentimes the headache and risk associated with scaling a business doesn’t seem worth it. Why not just keep things at a manageable level rather than invite all the problems that come with growth?

Regardless of why your business has stayed the size that it is, there’s a chance it may be too small to sell. This may sound strange. Why can’t you just sell your small business for a small price and get out from under it? The answer is two-fold: Smaller businesses come with too much risk, and too little cash flow.

The smaller the business the riskier it appears to outsiders, including potential buyers as well as lenders. The smaller the business, the more it tends to rely on the current owner, making the business worthless once they are gone. 

By way of example, if the potential buyer is an owner/operator, your business will need to reliably generate at least enough cash flow to:

  • Pay the new owner a market-based salary and benefits
  • Service debt assumed to purchase the business
  • Invest in maintaining and growing the business 

Many smaller businesses simply don’t generate enough cash to make the math work for buyers, or lenders.

TAKE-AWAY: The smaller the business, the harder it can be to sell. Run your business with an eye towards generating excess cash flow, and understand what it will take to satisfy the needs of a potential buyer. Whether the buyer is one owner/operator, a few individuals, a private equity group or a strategic buyer – they all have cash flow requirements that your business must meet.

Mistake #6: Selling Your Business in a Down Market

There are things you can control when it comes to timing the sale of your business, and things you can’t. This article focuses primarily on the former. With that said, it’s worth noting that it can be hard to sell a business when the economic environment in general is unfavorable. 

Characteristics of a difficult market include when access to capital is constrained for some reason, like during the 2008 financial crisis – when banks weren’t lending for anything that had “small business” written on it.

TAKE-AWAY: It’s best to sell your business when there is plenty of access to capital. In other words, banks are lending, interest rates are low, and buyers have plenty of cash to invest. The market offers up windows of opportunity to sell. But don’t forget: Windows open, and close.

Mistake #7: Selling Your Business During a Personal Crisis

While this scenario is sometimes unavoidable, it’s usually not the ideal time to try and sell your business. A few things end up happening when you’re trying to sell your business in the middle of a personal crisis (e.g., illness, divorce, dispute with partners or family members, personal financial trouble, etc.):

  • It’s hard to focus on an exit strategy that demands mental and emotional energy
  • It’s hard to make emotion-free (rational!) decisions
  • You may ignore the voices of reason, like advisors, friends, and family
  • Your personal situation may have already hurt the business, either operationally or financially
  • You may have to accept a lower valuation just to get out
  • You’re in a weak negotiating position
  • You’re often up against a time crunch

All of the above can affect the value of your business, as well as your ability to find a buyer. It can also lead to rushing the process, which may result in critical mistakes or oversights.

TAKE-AWAY: If you sense a personal crisis coming either in the short-term, or looming in the distance, contact a business broker immediately to discuss the selling process. Experienced business brokers can and do help owners sell during tough times, like prior to divorce or after a serious medical diagnosis. Just know that the longer you let the crisis unravel, the harder it can be to sell even the most successful business.

The best defense against the scenarios listed above is to start exit planning and building a sellable business today. As one of the advisors here at Allan Taylor & Co. likes to say: “I may not know when it’s the best time to sell a business, but I know when it’s the worst.”

Barbara Taylor is the co-founder of Allan Taylor & Co. You can connect with her on Twitter @ballantaylor and LinkedIn.

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