Here are 4 mistakes that are easily avoided when you have professional advice:
Mistake #1 – Accepting a Large “Earn-Out” Instead of Cash at Closing
A company comes to you with an offer to buy your business. They tell you what a great job you’ve done and what a great company you’ve built. Then they tell you about their company, they wine you and dine you, and maybe even fly you out to their corporate headquarters. You begin to get comfortable with them. They seem like good guys. Then they make an offer with a very strong price, but with one hitch. Most of the purchase price is an “earn out” – paid to you only if your company reaches certain performance goals going forward. This kind of arrangement may be acceptable if you get the bulk of the purchase price, let’s say 70-80%, in cash at closing. But if the numbers are reversed and you get only a small down payment – don’t do it. Even if you continue to run the company for the buyer after closing, you’re not really in control. They call the shots. And if their decisions cause your company not to do well, you’re not going to get paid the full purchase price. It’s that simple.
Mistake #2 – Taking Stock in the Buying Company in Lieu of Cash
Similar to Scenario 1, but instead of accepting an” earn out”, you accept stock in the buying company with just a small cash down payment. This is even more dangerous than the earn-out scenario. In the earn-out scenario, you’ll at least have some control of your company after closing. When you accept stock instead of cash, however, you are completely at the mercy of the buyer. If his company goes down, your stock goes down. And if the market tanks, as we all know it can, the value of your stock tanks as well. And what makes this scenario even worse is that the stock you received when you sold your business will often be restricted – you’ll be prohibited from selling it for a period of time after closing, typically two years. It’s a recipe for disaster.
Mistake #3 – Failing to Maintain Confidentiality
You’ve negotiated a deal with the buyer, the purchase contract is almost finished, the buyer has secured financing and the deal is scheduled to go to closing. You decide to hold a company-wide meeting to tell your staff about the impending sale. But then something happens. The deal is called off. Now what? Now your employees, your competitors, your vendors and your banker all know that you are trying to sell. Your employees get nervous and start looking for another job, your competitors tell your customers that you’re going out of business, your vendors put you on COD and your banker calls in your line of credit. It’s a nightmare scenario which, with the proper advice as to how to maintain confidentiality, could easily have been avoided.
Mistake #4 – Choosing the Wrong Business Broker or M&A Firm
You attend a seminar where a company promises to sell your business for three, four, five or even ten times its true value. Back away – don’t get sucked in. This is actually a very sophisticated scam.
Companies like this put on slick presentations, but are really only interested in collecting big up-front fees, not in actually selling businesses. They claim they can create a “frenzy of buyer interest” that will “skyrocket the price to stratospheric levels.” Don’t be fooled. It’s all smoke and mirrors. They want to get you excited and then stick you with a $30-50K up-front fee. And then good luck getting your phone calls or emails returned.
Don’t learn the hard way -- if it looks too good to be true, it probably is. Stick with a reputable Broker who is willing to earn his “success fee” only when the sale of your business is completed.
You are an expert in running your business. But you’re not an expert in selling businesses. Most business owners aren’t – they simply don’t have any experience with the process. Just as providing your product or service requires specific experience and expertise, selling your business requires a specific, but different, set of experience and expertise.
Your business very likely represents your largest personal asset. Selling your business – turning your biggest asset into dollars – is too important to be left to an amateur. You need the services of an expert – a qualified, experienced Business Broker or M&A Advisor.
For other valuable tips about selling your business and to learn more about the business sales process in general, click on the link below, visit us at www.primeinvestments.us or call us at 240 290-5000. We’ll be happy to schedule a free initial consultation and complimentary business appraisal.
There’s never an up-front cost or obligation, and all communications will be held in the strictest confidence.