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Mistakes To Avoid When Selling A Business

Updated: January 4, 2023

Est. Reading: 5 minutes

Selling your business can be an exhilarating and stressful time, whether it's your first sale or your tenth sale. A Glendale business attorney is a great resource for navigating the logistics and legal process of selling an entity. Here we outline the common mistakes that can complicate, affect profit, and sometimes terminate a sale. These mistakes include everything from incorrect pricing, failure to utilize professional services, unrealistic expectations, and misconduct throughout the sale process. Learn how to avoid these errors and gain tips on what to look out for during your business sale process

Pricing Incorrectly When Selling a Business

One of the most common errors owners make when selling their company is setting the wrong price. Overvaluing an organization could deter potential buyers while setting too low of a price could lose money for the seller. 

Many sellers begin this mistake by thinking they alone are qualified to handle the valuation process. To avoid this, it is important to hire a broker, investment banker, financial advisor, or qualified business appraiser. These professionals will be able to look at all aspects that create value. They will be able to reference comparable market prices, and the economic climate, evaluate the current business value based on revenue trends, investments, and business plans, and be able to appraise the value of future revenue and growth potential.

person talking to a lawyer about their business, Mistakes To Avoid When Selling A Business

Underestimating an organization's value can be just as damaging as overestimating. A company is worth more than its current production. In order to set a competitive price, the seller must demonstrate the future gains that are possible for the buyer from the acquisition of their operation. What is the potential growth? What is the longevity of the business? What time and money is being saved from purchasing a functional operation instead of building from the ground up? What is the value of the inventory and equipment? All of these things should be considered when establishing pricing so no money is left on the table.

Failure to Leverage Professional Services

Not taking advantage of the services available when it comes to selling a company can create many issues during the process. Many owners mistakenly believe that their success in running their operation qualifies them to successfully handle the sale. But these are two different tasks entirely. Using the aid of professional services can also alleviate work and stress so you can continue to keep your organization running efficiently. How does it look to potential buyers if your production begins to decline because you are having to sacrifice time and energy to navigate a sale?

FAQ: How to choose the right entity for your business?

There are many services that are overlooked or undervalued when it comes to selling an entity. As mentioned before, it's imperative to seek professional help when setting the sale price. A qualified business appraiser should be utilized to make sure every asset of the business is reviewed to establish a fair market price. You don't want incorrect pricing to cost you a sale or to sell your company for less than what it is worth. 

The services of a broker or investment banker should also be used to aid in the process. Business brokers are best for smaller deals while investment bankers handle larger-scale transactions like commercial sales. These professionals will oversee the review and filing of documents as well as get your listing into markets and in front of buyers that you may not have access to on an individual level.

Additionally, they will help you construct the type of deal you would like to make. Have you considered how much you are willing to pay in closing costs, income taxes, tax returns, or other hidden fees? Do you expect your buyer to pay cash in full at the time of closing or will you facilitate a loan? Will you stay involved after the sale and what type of services are you willing to provide and for how long? What sort of non-compete and confidentiality agreements are you ready to sign?

While it's easy to hope and wish the sale of your business is a quick and seamless process, this is often not the case. If any issues arise, you want to know you utilized every service available and have protections in place. Oversights in the preparation process could be costly down the line.

someone buying a business, Mistakes To Avoid When Selling A Business

A business attorney or commercial entity lawyer can also provide assistance that will lead to a profitable and smooth transition. They can help you decipher and construct contracts so there are no surprises at closing. A lawyer will mostly help with legal documents and asset division. How will profits and debts be managed and divided at closing? What about income taxes from the sale? Who will oversee tax records, sales receipts, and open accounts during and after the selling process? An attorney can work as a team with a broker or investment banker to help you secure an optimal price. Additionally, they will help establish liability in the event of any unforeseen legal issues. 

Disengaging from the Business Sale Process

One of the biggest mistakes that sellers make during the selling process is disengaging from the operations too soon. Many sellers stop putting in the effort once they have secured a serious buyer. This can be a detrimental mistake that can cause buyers to back out at the last minute. 

The owner must be invested in the success of the business until everything is signed and closed. Some business owners get excited about relinquishing their company and stop support before the completion of the sales process. This could cause damage to revenue, current employee morale, and relationships with customers and vendors. If those relationships are harmed, they will be reflected in the performance metrics. If the metrics have a negative impact, the potential buyer could lose faith in the business and decide to exit the transaction. Or even worse, the business could fail and you could lose the opportunity to sell entirely.

FAQ: How will your business entity affect taxes?

Sometimes you may need to stay engaged even after the sale is complete. You may determine how much involvement you would like to provide to the seller after closing, but this should be agreed upon in advance and you must continue to meet those expectations. 

Doing it All Yourself

Through reading this article, you've probably learned there is a lot more to selling a profitable entity than just signing a piece of paper. Reviewing financial documents, appraising the value, structuring a sale, finding interested buyers, protecting yourself and your employees, maintaining optimal production, and distributing assets and debts are just some of the tasks when it comes to selling your company. Don't make the mistake of trying to handle it all on your own. Utilize every expert available to you in order to have the less stressful and most profitable outcome. 

Our lawyers at Monahan Law Firm are experienced in all the ins and outs of business sales. We know the common mistakes and how to prevent them. We handle all the paperwork and legal undertakings so that you can oversee the operations of your entity and continue to make it a desirable purchase for prospective buyers. We will work with brokers, bankers, and buyers to get you the price you deserve without all the complications. Contact us today to begin your process of a satisfied transaction experience.

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Attorney Patrick Monahan

Patrick Monahan

Patrick Monahan is the managing partner of Monahan Law Firm, PLC. Patrick began his legal career practicing real estate, construction, and general business litigation.
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