Many entrepreneurs plan on utilizing the proceeds earned from selling their businesses to fund their retirements. However, the Northeast Ohio Chapter of the Exit Planning Institute’s 2013 State of Owner Readiness Survey revealed that over 80 percent of business owners have no formal transition plan.
In addition, only 25 percent of businesses up for sale tend to actually sell — odds that are likely to become worse as millions of baby boomers attempt to sell their businesses over the next decade in the “Exit Bubble.”
Combine the lack of readiness with those historically low success rates for selling a business, and an entrepreneur could find herself facing a perfect storm.
Here are five tips to increase your odds of negotiating a successful business sale.
1. Start planning now. It is never too early to start planning the sale of your business. You’ll need to become informed on the emotional aspects to anticipate, and educated on the numerous tactical complexities of the business sale process. This will help put you on a level playing field with buyers and increase the odds of a successful sale.
2. Create a clear vision of what comes next. One of the biggest reasons businesses don’t sell is that business owners don’t have a vision of what they will do afterwards. They can’t imagine not being the owner of “XYZ Company,” and the fear of the unknown causes them to walk away from a deal at the last minute. For you, what comes next might involve working in a different occupation, dedicating more time to charity work or becoming a coach. Taking the time for this introspection early in the sale process greatly increases your odds of successfully getting to the closing table.
3. Be armed with the facts. It is natural that, as a business owner, you value your business higher than most buyers. You have spent years of blood, sweat and tears building your company ,and you know it inside and out. Unfortunately, buyers don’t have that same level of understanding or legacy. Before buyers begin to ask questions, perform your own pre-sale due diligence on your business. View your business through the eyes of a potential buyer to identify impending issues and arm yourself with facts. Sellers who can answer detailed questions with facts and data (as opposed to opinion and anecdote) instill confidence in buyers and make the due diligence process easier.
4. Minimize surprises. Surprises are fun for birthdays, but not when selling a business. When dealing with a potential buyer, it is human nature to want to avoid discussing a negative issue such as a troubled customer relationship — especially for proud business owners who feel confident the relationship issues can be resolved. Buyers may not have that same confidence without years of established history with that customer. Instead, identify potential negative issues during your pre-sale diligence, and disclose them immediately while you still have negotiating power. Once you sign the letter of intent, a negative surprise in due diligence could result in a reduced purchase price or a failed deal.
5. Don’t take it personally. Due diligence is the most personal thing you will do in business, but it’s critical you don’t take it personally. Buyers routinely perform due diligence to confirm what you have told them and to find potential reasons to reduce the purchase price. This is standard business practice. Buyers question everything about the business and want facts to support the answers you have provided. You might feel like you are being attacked and a buyer is criticizing your business. By having a vision for your life after you sell, and by being prepared to answer the difficult questions, you can keep your emotions in check and get to the closing table.
You may not be planning to sell your business anytime soon, but keep in mind that you might find yourself needing to sell your business. An unexpected illness (yours or that of a family member) or a significant change in your financial situation may bring you to the negotiating table sooner than anticipated. Preparing yourself and your business now will increase your odds of a successful sale whenever the time comes.