The entrepreneurial journey is unlike anything else. From the weight of responsibility that falls usually on a single individual to the ups and downs that occur throughout, owning a business is one of the most exhausting - yet rewarding - ventures for anyone to experience.
Like all journeys, the entrepreneurial one comes to an eventual end – ideally with a sale of the business.
For an entrepreneur, selling their business is a significant moment in their lives. Regardless of whether they are selling to jump start retirement or move on to new business ventures, this type of liquidity event can dramatically affect one’s lifestyle. The financial impact that follows a sale can completely change an entrepreneur’s life.
The level of significance further underscores why it’s imperative that an entrepreneur approaches the sale in the right manner. What exactly does it mean to sell your business the right way? Avoid these three common mistakes that too many entrepreneurs make when selling their businesses.
Waiting too long to plan
Not many entrepreneurs start a new business with a plan in place for an eventual sale. Their sole focus is on getting the business off the ground and growing it to be successful.
As a result, it’s easy to set preparations for a potential liquidity event aside with no plan in place. But if an offer appears and the owner has no strategy or team in place, it would be difficult to properly evaluate the offer.
The “right” time to plan for selling completely depends on the business cycle, making it a unique experience for each business. If possible, a three to five-year window prior to an intent to sell is not too soon. With adequate lead time, entrepreneurs are able to plan more effectively and have more opportunities to leverage the strategies they’ve put in place for potential liquidity moments.
Thorough planning and preparation for the sale of a business will better position the owner to reduce the amount of taxes they pay over time, increase the possibility of passing along assets to heirs or a charity in a tax-favorable manner, and ease the transition of moving on from the business to their next venture.
Not properly understanding what the business is worth
Making the most of selling a business means understanding what constitutes a good or bad offer. Unfortunately, entrepreneurs often don’t study or approach a potential sale of their business with a proper expectation of what they could receive for their business.
How does the market value businesses in specific industries? Is it a multiple of revenue? A multiple of EBITDA? Is 5x appropriate for my business, 10x, something else. Not all industries approach valuations the same way. It’s important to seek advice from professionals with relevant experience about what factors influence valuations and what realistic expectations are, in order to plan your financial future accordingly.
Understanding what the business is worth will allow entrepreneurs to avoid accepting an offer that’s too low or approaching a sale with unrealistically high expectations.
Failing to build a team of business experts
Entrepreneurs are experts in their own right, but typically their expertise lies within the specific industry of their business – not in business acquisitions or liquidations.
One of the first steps in properly planning for a potential business sale is understanding what kind of team is needed in order to reveal the blindspots entrepreneurs often miss.
Seeking professionals that have been involved in business acquisitions and liquidations before – such as a financial advisor and a lawyer – will help entrepreneurs surround themselves with the specific skills and expertise needed to maximize the earnings potential of selling their business.
More importantly, working with a financial advisor, especially within the important 3-5 year window of pre-transaction preparation, will force entrepreneurs to ask the right questions regarding a business liquidation:
- What do I want to do with the proceeds once I sell?
- How will this impact my family?
- How can I ensure I’m able to accomplish my life goals through this sale?
- If I’m paid X amount of dollars, does my plan work?
Answering these questions ahead of time with the help of a financial advisor will allow an entrepreneur to navigate this incredibly important time with more ease and clarity.
After all, selling a business and experiencing a windfall is usually a once-in-a-lifetime moment. By leveraging the help of professionals and diligently preparing ahead of time, entrepreneurs can successfully avoid these three common mistakes and ensure this life-changing event is one that propels them into achieving the lifestyle of their dreams.