Seven Mistakes You’re Likely to Make When Selling Your Business | Whitcomb Selinsky, PC

[author: Andrew Newell]

Business owners usually reach the point where they want to retire or have had enough time to run their own business and are looking for new opportunities. Listed below are seven common mistakes business owners can make when selling their business.

YOU DID NOT THINK ENOUGH ABOUT HOW YOU WERE PAID

Business owners almost always have an idea of ​​what their business is worth, and it’s usually based on some formula they’ve either heard of or developed themselves over the years. What owners often fail to consider is how drastically this cost can differ depending on the means of payment. An all-cash sale at closing should carry a different price than, for example, an installment sale over a period of years or a payment based on future revenues or profits of the new owner. Most landlords drastically underestimate the effective discount they give buyers when the terms don’t include 100% cash up front.

YOU DIDN’T THINK ENOUGH ABOUT WHAT HAPPENS IF YOU DON’T PAY

Successful business people tend to think positively and assume success. A great quality to have when running a business, sure, but it often blinds owners to what can and often will go wrong in a sales scenario. What if your buyer stops paying in installments? Can you get your business back (and do you want to)? What if they have seriously damaged the value of the business through mismanagement? Have you created unknown liabilities, such as potential employee lawsuits, that you don’t want to risk? Even if you have the absolute right to repossession, your optimistic nature may prevent you from recognizing the risks that remain.

YOU WERE NOT CREATIVE ENOUGH

Every business transaction is different, and almost every possible transaction offers creative ways to generate more value, often for both parties. Staying on as an employee and teaching the buyer how to run the business is a classic example of creating profitable value, but there’s always more. Businesses can lend themselves to creating residual income through royalties. You may wish to retain a small ownership stake if you believe the company may be on the verge of great things under new management. It may make sense to structure the purchase price with contingencies based on the company’s short-term performance after the sale to build trust with the buyer and increase the overall value of the deal.

YOU ARE NOT AWARE OF THE TAX CONSEQUENCES

It’s not uncommon for business owners, especially small business owners, to count the number of months they’ve owned a business, determine whether they’ll owe short-term or long-term capital gains taxes on the proceeds, and end their tax considerations there. There are various strategies for overall tax deferral, and a good tax strategy can often be more important to the bottom line than the sale price.

YOU HAVEN’T BEEN REALISTIC ABOUT YOUR BUYER

For a number of reasons, you may be blind to the obvious red flags for your buyer or mistakenly think they don’t matter. They always matter. There is no adequate legal remedy for doing business with unethical people and companies. No lawyer, no contract, no advance payment of any amount can offer you complete protection. It is due to your due diligence buyer, and not only their financial status, but also their business history. People and companies involved in multiple lawsuits should be avoided at all costs. You don’t want to be the next entry on the list. Even large companies vary widely in terms of meeting the terms of their business commitments. Don’t assume that every company, big or small, is “okay”.

YOU DID NOT SEEK LEGAL OR FINANCIAL ADVICE BECAUSE IT WAS TOO EXPENSIVE.

One thing that almost all successful small businesses have in common is a focus on the bottom line, and often that means watching expenses like a hawk. This is often counterproductive in professional services, especially when selling a business. The sale of any business can benefit from the insight of a good business attorney. While there are certainly some deals that are too small to justify the expense, the number of deals that fall into this category is so small that you have to assume that yours is not one of them. A good transaction attorney won’t cost you money, he or she will save you money In extreme cases, they may even prevent you from making a monumental mistake.

YOU ARE NOT ADVISED OF THE POTENTIAL RISKS OF THE TRANSACTION.

I tend to call this the “unknown unknown”. These are the things you haven’t even considered as potential risks because we’re all limited by our own imaginations. For example, a former client of mine never imagined he would be embroiled in company-sized litigation when he drafted his own independent contractor agreement to pay part-time workers instead of consulting an attorney. Or when they drew up a temporary lease that led to the confiscation of their entire company. They are simply not risks that were foreseeable to them when they entered into these transactions. The stakes in selling a business are usually even higher than ordinary transactions.

CONCLUDING THOUGHTS

Take nothing for granted when selling your business. Question everything, including your own biases, because they often prevent you from seeing the whole picture. Almost all transactions will benefit from the involvement of a professional, usually an experienced attorney. Above all else, never do business with people you know to be dishonest or unethical. This rule alone will help you avoid most of the risks you face when selling your business.

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