2018 Business Sales Observations – Pitfalls to Try and Avoid
Besides spending the holidays in keeping with our family traditions, this is also a time where business owners typically take time to reflect on their past year and set goals for the upcoming year. We do these things to improve our businesses, which will eventually help when it comes time to sell the business. Besides taking part in these same activities, we also took some time to reflect on some of the things that we witnessed business owners doing over the past year that you may want to avoid doing yourself. We share these high-level observations, over four broad categories, in the hopes that you might avoid doing the same, or at least consider the consequences if you choose to go down any of these same paths. These observations (all from the perspective of a business owner) include:
- Poor Books and Records
- Co-mingling of their personal life and business finances in bank account(s), credit card(s), etc., which makes it difficult to represent the true earnings and discretionary earnings / cash flow of the business.
- Not reporting cash and having an expectation to use this unreported cash as part of a valuation. While dealing with this issue early in my career, my first broker and mentor told a prospective Seller that he couldn’t steal the money twice.
- Not having an accountant/CPA and no accountant/CPA prepared financials.
- Unrealistic Seller Expectations
- Sales price. Too high is bad and too low is even worse. If it is too high, buyers won’t take it seriously and there will be little interest. If too low, the Seller will more than likely leave money on the table. Best advice we can provide is to get a valuation done if you are considering selling your business.
- Demanding all cash. In a perfect world, the business will be pre-qualified for SBA lending, and the seller will get all/or most of their cash at closing. In cases where this is not feasible, if the seller is serious about selling, they will have to be willing to serve as the bank and hold a seller’s note.
- Timeframe to sell business, which is dependent upon a myriad of factors. Our data shows that the average time to sell a business is between 7 to 9 months from signing a listing agreement. We have sold businesses in less than two months and some have taken over two years.
- Not renewing a lease, or having options when it comes time to sell, which puts the landlord in a position of power and brings uncertainty and an added element of risk to the buyer’s mind. Month to month leases may make the seller’s feel comfortable, but are terrible when it comes time to sell.
- Not reading the lease, or being aware of what they have signed – are you, the business owner, a personal guarantor, which may require them to stay tied to the lease after assignment; landlord’s ability to withhold assignment; assignment fees, etc.
- Is the seller defaulting in anyway on the terms of the lease – reason for landlord not to assign.
- Poor Inventory Management
- Not properly tracking/reporting, and in one case purposely manipulating the figure to artificially reduce their income.
- No idea of how much inventory on hand. In one instance we had a seller that had never done a physical inventory count.
- Too much inventory, which ties up cash and brings with it other associated expenses in such areas as interest if financed, storing, handling, insurance, etc.
If you would like to discuss the business sales process, or have any other related questions, feel free to give us a call to set up a complimentary no cost and no obligation consultation. Wishing you all a very Merry Christmas and a Happy New Year.
“One of the Most Active Business Brokerage Firms in Florida VR Business Sales has been the leader in the business brokerage industry for over thirty-five years and consists of approximately 50 independently owned and operated offices worldwide. VR Business Sales located in Tampa/Apollo Beach was founded in 2012 and offers VR’s exceptional brokerage services to the Central Florida market. We represent a wide variety of business owners operating within a wide range of industry segments. Our office consistently ranks within the Top 10 offices in the VR network, and most recently in 2016 we were the #3 office in commissions earned and had the #1 office owner and #3 sales associate; and in 2017 we had the #10 office owner. Call us at 813-260-3127 to arrange a meeting.”