4 Common Mistakes When Selling a Small Business
When it comes time to sell, it’s easy for small business owners to get caught up in an unfamiliar and emotionally fraught process. Here are a few common pitfalls and how to avoid them.
Mis-valuing your business
Overvalue your business and you’re likely to hit a dead end, but undervalue your business and you’ll leave money on the table.
Your business is generally worth a multiple of its profit. For smaller businesses (which sell for under $3 million), the sale price is usually 2-3 times annual profits. For larger businesses ($20 million and over) the multiple could be as high as 5-10, depending on sector or industry. An analysis by Digital Exits examined over 14,000 transactions and found the average sales price was 2.59 times annual profit. Consider your own profits and use this multiple to arrive at a very rough initial valuation, and consider enlisting the help of a Chartered Business Valuator to get a fuller picture of the industry and the market.
Want to understand how other aspects of your business might affect the valuation? We have a calculator that can provide you an estimated valuation, totally free.
Rushing a sale
As a general rule, it’s never too early to develop a succession plan for your business, even if you have no immediate plans to sell. At the end, certain scenarios such as burnout or declining profits might incentivize business owners to get out quicker. With advanced planning, you can better manage those situations and in turn maximize the sales price of your business. A succession plan will also make your business more appealing to potential buyers, who’ll feel better set up for success.
The Digital Exits analysis found the average sale process takes about 7 months, depending on the complexity of the business, but could take as long as a year. At BuyAndSellABusiness.com, we’ve worked tremendously hard to attract the right audience of buyers and sellers, and we’ve been able to reduce the selling timeline by 39%, down to an average of 4.3 months.
Selling to the wrong person
Cyril Cochrane, the managing director of growth and capital transition of the Business Development Bank of Canada, has a maxim: “Don’t choose the price, choose the buyer.” Selling to a family member may sometimes be a better decision than selling to an external buyer or vice versa.
Remember the first offer is not necessarily the best one. Debbie Allen, an entrepreneur who has bought and sold more than six businesses, wrote that business sales often go bad after new ownership takes over. “The new owner may lack business experience, have a closed mind or be a poor leader…when this happens the new owner ends up going out of business and leaves the previous owner holding an empty bag.”
As a seller, she said it is best to think long-term. “Selling your business for top dollar with little or no money down along with an extended contract may lead you to lose it all.”
Getting too emotionally invested
As a small business owner, your business is more than just your livelihood—it’s part of your identity. It’s something you’ve grown and nurtured. We understand why you’d be attached to it.
Still, it’s important to recognize when this could be hurting your prospects of selling your business. For example, if you’ve treated yourself as irreplaceable and failed to develop teachable processes to run your business, it’ll damage your prospects of finding someone who can replicate your success. That could also affect your business’ valuation.
Selling a business is a transaction. It’s one of the biggest transactions of your life, but a transaction nevertheless. Set realistic expectations, get help from the right people, and keep everything in perspective.
Looking to sell your business? Check out Buy and Sell A Business’ other resources
· Get chatty on our Business Advice Forum
· Access tips, tools and perks to help create a more valuable and sellable business here
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