By the time clients are thinking about selling their business, they have usually sold at least one home, sometimes many homes. See if this scenario sounds familiar: You get your house ready to sell and the first potential buyers come through and relay several objections to parts of your home. Maybe they think the kitchen is outdated, or the carpet needs replacing in the bedrooms, or they wonder aloud if you have a radon issue in your basement. Then the real pain starts and they put in an offer through their agent at 82% of the listed price! After you get through being properly insulted, vowing never to sell to ‘those people’, you may realize that this is a normal part of the sale of any large asset – negotiation.
If we are going to get this house sold, you might think about a counter offer to get them closer to a price you believe is correct and that you can accept. Therefore, you offer a credit for new carpet and appliances. The radon issue is fact based and it will be checked. The buyers have also come to realize they really want to be in your neighborhood so they stay engaged in the process of the back and forth negotiation until a deal is reached. Both parties get most of what they want.
Could the seller have done more to prepare their home for a better price at sale? They could have spent money on staging, changed the carpet to something new and neutral and had the radon tested and either certified it was not an issue or mitigated it. Chances are they would have more than made their money back with a little time and effort.
When selling a business, it is critical to put your best foot forward right away. To do this, you need enough time to realize an accelerated value. Efforts to make the business attractive to buyers are important but it’s even more important to make sure the business is ready to sell. Some of the reasons that buyers discount their early offers include:
- Your goal as a seller is to show the highest earnings potential to buyers.
- Recasting has the effect of letting the buyer stand in the owner’s shoes as if they already own it.
- Adjustments can include removing personal expenses, salary of the departing owner, and past charitable gifts based on the interests of the seller (i.e. golf sponsor)
Reputation or relationships the business has not maximized
- Is the business growing?
- What is the reputation of the business in the community they serve?
- Online reviews?
- We all adapt over time to make our businesses run. Then, in comes a buyer with fresh eyes who sees just how disorganized our books, factory, or service is and discounts in anticipation of having to spend money to get on the right track.
- Depending on the business, the buyer may determine that they need liability insurance, errors & omissions insurance, or a clawback based on the level of disorganization.
Knowing the pitfalls, a smart owner can take steps to avoid these common issues.
When you sell your business, prepare to be properly insulted by initial offers if you have not spent the time, effort, and some money to prepare your business for astute buyers. With enough time and effort, you can realize its true value and fund your life’s next adventure. In fact, you can go buy the house of your dreams, perhaps from an unprepared seller!
Bonnie A. Sewell, CFP®, CDFA™, AIF®, CEPA® is NOT AN ATTORNEY AND DOES NOT PROVIDE LEGAL ADVICE. All information he provides is financial in nature and should not be construed or relied upon as legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal professionals knowledgeable about the divorce laws in their own geographical areas or CPAs qualified to provide tax advice.
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