Founder and managing member of Upton Financial Group, an advisory firm specializing in business value strategies and solutions.
Are you your own worst enemy when it comes to selling your business for a high price? Many entrepreneurs expect to reap a nice profit when they make their exit but discover mistakes that crush the value when it’s too late. “Poor seller preparation”consistently appears in the top five reasons deals fail inthe Market Pulse survey published each quarter by the Pepperdine Private Capital Market Project, International Business Broker Association (IBBA) and M&A Source. Avoid these five critical errors and you’ll achieve a much greater profit from the deal.
Value crusher 1: Not owning all of it. To max out your valuation when you close, you must have proprietary ownership of your web domain, business name, business logo and phone number.
Think you do? Think again. One attorney I know worked out of an executive suite for 20 years.When he tried to move and take his phone number with him, guess who owned the phone number? The executive suite.
I am currently working with a business owner who has a great logo well known in the community. Unfortunately, the graphic designer who created the artwork owned it. There was no work-for-hire agreement assigning rights to my client.
The more boring the paperwork, the more likely entrepreneurs are to neglect it — and to suffer big hits to the value of their business. Case in point: Many business owners fail to run their doing business as “DBA” registration every five years in a newspaper, which is required to keep it alive. Generally, this needs to be done for each county in which you do business.
Do you have international trademarks for all the countries where you sell? Have you kept them up? Many people did not spend the time or money with their attorneys to protect their intellectual property during the recession — and it’s hurting them now.
Value crusher 2: Contracts you can’t transfer. I ask clients to review all of their contracts with clients before we go to market to see if there is a “change of control” problem. Many times contracts say you must tell the client that you are selling the company. Sometimes, clients will balk at working with a new owner, unless your contract allows you the right to assign it to someone else. This is especially true with specialty contractors who have contracts for maintenance or projects that last longer than a year. Naturally, your business will be worth less to a buyer if he can’t automatically continue doing business with your existing clients.
Leases are a minefield. You know the old saw about “Location, location location.” Well, just because you’ve locked down the best locale in your city at a great price, it doesn’t mean your buyer can run the business there. The lease is probably not transferable, unless you have negotiated this.
Many years ago I was helping a client sell a business with six locations. We were selling to a national public company that was much stronger than my client financially. The public company was in a feud with the client’s landlord, also a Goliath. We got stuck in the middle. In the end my client had to guarantee the lease obligation, which meant he had to remain on the lease and put money in escrow in case the new tenant defaulted.
Value crusher 3: Records gone MIA. I got a call recently from a business owner who outsources to a private-label manufacturer. When I asked to see if there was non-compete agreement in the deal with the manufacturer, he did not even remember if he had a contract. They had worked together for the last 15 years. Imagine the impression it would make if a potential buyer asked to see the contract and the owner admitted he had no clue if there was one.
Value crusher 4: Late financials. Do you produce your financial statements on time — meaning by the 15th to 20th day of each month? I cannot tell you how many times deals have been killed because of a seller’s inability to produce timely financial records. Doing so is mandatory if you are selling to a private equity group or public company. Don’t assume that because your business is small, you won’t attract prospects like this. If your business has a value over $5 million, it will be sold to a private equity firm or strategic buyer 87% of the time, according to recent research.
Value crusher 5: Lack of sales data. To sell for a high valuation, small business owners need reports that show sales by product or service and margins per customer, per location, per sales person. You might think that if you’re a small business, it does not matter. The smaller you are, the more important it is! A big company already knows what your margins are before you negotiate a deal. It has done background research and is just confirming. If your margins are greater than those of your acquirer, this will be the big reason it will do a deal. Being able to back up what your prospective buyer already knows will help you sail to a higher valuation.
Six Ways You Could Kill Your Startup
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