For many entrepreneurs, the sale or transfer of a business is like giving up a baby they have raised from infancy.
Certainly, there’s a lot at stake economically, given that 80% to 90% of owners have their financial wealth locked up in their companies, according to estimates from the Exit Planning Institute, an education, training and credentialing organization. Many owners also underestimate the many emotional aspects that go hand-in-hand with exiting a business.
Here are five mistakes owners should avoid when selling a business.
Many businesses don’t have an exit plan or they don’t strategize adequately for a multitude of scenarios, said James Jack, who runs the business owners client segment at UBS Global Wealth Management. And that leaves them susceptible in the event of death, divorce or if a suitor, such as a private equity firm that’s hungry for a deal, comes knocking. Fifty percent of exits in the U.S. are involuntary due to death, divorce, disability, distress or disagreement, according to the Exit Planning Institute.
To avoid scrambling, or being forced to accept a lower purchase price, owners should scenario plan at least once a year with advisors that include a CPA, financial advisor, attorney and family members, if applicable, Jack said. They should also maintain an up-to-date business valuation.
Even with planning, it can take six to nine months to get from the point of starting the sale to consummating a transaction with an outside buyer, said Scott Mashuda, managing director of River’s Edge Alliance Group, an M&A advisor to businesses. “Failing to plan is planning to fail.”
Some owners, who could be used to a do-it-yourself approach, may try to do the same when it comes to a sale or transfer of their business.
But taking this step, without consulting outside advisors such as M&A specialists, valuation experts, CPAs and attorneys, is ill-advised, according to exit planning professionals.
Justin Goodbread, a certified financial planner and president of the wealth management firm WealthSource, offers the example of a six-figure mistake that he — a seasoned exit planning professional — almost made in a recent deal. Had it not been for his outside advisors, he would have signed an official letter of intent that would have limited his tax-planning ability.
“As a Certified Exit Planning Advisor, I know all of the necessary steps to take when navigating a business sale. Nonetheless, my eagerness to close the deal caused me to miss a step,” he said in email comments. “Because my attorney and CPA were involved, they were able to tell me to slow down, and we were able to transact in a more tax-sensitive manner,” he said.