Avoiding pitfalls when selling a business

Nation's Business, July, 1998 by Abby Livingston

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A business owner can spend a lifetime building a company, then lose a large measure of its value by making mistakes through inexperience during a one-time event--selling the firm.

"Savvy business owners, worth millions, are underdogs when it comes to negotiating the sale of their business," says Colin Gabriel, a business broker in Westport, Conn. Gabriel, author of How to Sell Your Business--And Get What You Want! (Gwent Press, $24.95), says sellers "lack experience, and emotions tend to influence their judgment. On the other hand buyers know the subtleties of mergers and acquisitions."

A record number of businesses have been up for sale lately. There were more deals done in 1997 than in any other year, and 1998 so far has also been sizzling, according to Mergers & Acquisitions magazine.

The same factors that stimulate big-company transactions--the strong economy, low interest rates, and high stock prices--are encouraging smaller deals, too.

Market conditions aside, current demographics favor an increase in sales of small and midsize companies as today's business owners enter their 50s and 60s and begin to think about doing other things--from consulting to traveling to managing their investments.

When it comes to selling a business, here are some traps to avoid, according to experts in the field and people who have sold their companies.

Being unprepared. Since you never know when you might be approached by a prospective buyer, you should have on hand a good business plan and audited financial statements. Having the financials, in particular, will boost your credibility and ease buyer anxiety.

"There's always skepticism about a private company's reported results, but three to four years of audited financial statements from a regional or national CPA firm will alleviate most concerns," says Steven Elek, a partner in the Philadelphia office of Coopers & Lybrand, an accounting and consulting firm.

Having good financials also shortens the due-diligence phase of negotiations and is key to maintaining a deal's momentum. Just ask Greg Smith of Greensboro, N.C., who has sold four businesses--all involving industrial electronics and electrical equipment--in the past 21 years.

"I didn't have audited financials when I sold my first business at the age of 27," he says. "We had to re-create audited financials from unaudited reviews, and so the due-diligence period took a number of weeks.

"The next time I sold a company, I had audited financials, and the due-diligence period was cut in half. We also grabbed the attention of interested parties more quickly because they knew from the get-go that our financials were accurate."

Overestimating the value of your business. Generally, sellers think their businesses are worth more than they are. "The owner has built the business [and] thinks it's the greatest thing and worth a fortune," says Mendy Kwestel, a partner and director of entrepreneurial services in the Parsippany, N.J., office of Grant Thornton, an accounting and consulting firm.

Such misconceptions often are formed by looking at the price multiples of transactions involving large public companies, which can sell at 20 times earnings.

The problem is, these multiples don't apply in sales of closely held companies, and such unrealistic price expectations can make a business more difficult to sell or can prolong a process that typically takes at least nine months to complete.

Worse yet, a seller who goes into a deal hoping to negotiate a higher price probably will be disenchanted and will waste several months and thousands of dollars in legal and investment-banking fees.

The bottom line: Be realistic about your company's worth.

Managing the sale yourself. Finding a buyer should involve more than querying a network of suppliers, customers, and other business contacts. In fact, that strategy--while inexpensive--can prove disastrous.

Too much advance notice of your intentions could encourage competitors to try to buy the business. That could undermine service and jeopardize customer loyalty, resulting in a tarnished reputation or reduced revenue stream.

Either outcome could minimize your company's value.

In addition, you don't want employees to find out prematurely that the business is for sale. "They may fear losing their jobs and look for positions at other companies," says Elek. "A loss of talent during the sale process could compromise the deal getting done, as well as its pricing."

However, a professional adviser, such as an investment banker or a business broker, will know how to market your company--for example, who and where potential buyers are--as well as how to negotiate and structure the deal in the most confidential manner.

The business broker or investment banker you select should have experience in valuing businesses in your industry that are similar to yours in size. "Not only are the value parameters in each industry unique," Elek points out, "but size has an impact on the amount of attention and interest that a banker or broker will place on your deal."