Seven mistakes to avoid when valuing and preparing your business for sale

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Whether you always planned to sell your business, or the kids went in a different direction, putting a price on your creation can be a fraught process.

Valuation of a business in preparation for sale can be more complicated than owners expect, says Robert Bezede, a director of Norton McMullen Corporate Finance Inc. in Toronto and an advisor for small and medium-sized businesses. “There are a number of factors that some owners don’t consider at first. Everything from the size of their business, to how involved they are as owners to the risk in their industry and the concentration of the customer base. You have to do research and prepare your business for sale.”

Often a lot of the most important work happens even before the business goes up for sale, says David Prowse, David Prowse, certified business valuator and principal of Velorum Business Advisory in Burlington, Ont.

And it is important to be patient with prospective buyers, says Mike Finger, transition advisor and founder of Exit Oasis, based near Minneapolis-St. Paul, Minn.

Three-quarters of owners who sell regret their decision a year after the sale, says Eric Gilboord, CEO of Brighton, Ont.-based Warren Business Development Centre Inc. If you are a business owner who may one day sell your business, make sure you are not one of them.

Experts offer advice on seven mistakes for business owners to avoid.

1. Being unrealistic — Experts talk about “country-club valuations” — hearing rumours in the locker room about what so-and-so got for their business. Do not rely on locker-room talk — it is better to consult a certified business valuator.
2. Waiting too long — The time to consider selling your business is five or even 10 years before you are ready, experts say. That is why it is called “transition.” You need that much time to prepare, both for the sale and for the personal changes you will make once you are not the owner.
3. Not understanding the market — You may have a great company that does lots of business with a few customers who know you well — that may be a good business for you, but it is not necessarily attractive to a purchaser. Your valuation may need to be low if 50 per cent of the business relies on three or fewer customers.
4. Not understanding your company — The nature of your business (its size or how it is structured) may allow competitors to simply acquire your customers without paying for your business.
5. Seller’s remorse — The reasons that three-quarters of owners who sell their business regret their decision a year later can be complex, but they can be minimized by coming up with a fair, reasonable price in advance.
6. Bad planning — Have you thought of what you are going to do after the sale? Will you be barred from working in your own field under the terms of the deal? If you are barred, will you be bored? Try to factor in these considerations.
7. An uncomfortable transition — Many transitions require the seller to stay with the company for a set time after the sale, often a few years. This is good for the buyer, but for the seller it can be agony watching the company move in a new direction or the new owners making decisions you disagree with. Enlisting the services of a mergers and acquisitions professional can help smooth the process.