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Five mistakes when preparing to sell your business (and how to avoid them)

Are you ready to sell your business? We recently ran an article in The Globe and Mail that discussed how to sell your business in a crowded market. We wanted to build on that and take a deeper dive into this topic.

We understand that preparing to sell your business can be a daunting task, so we asked First West Capital Director, Debby Fu, to provide some guidance.

Here are 5 common mistakes and how to avoid them:

 

1. Failure to plan ahead

Many business owners are not prepared with their finances and financial statements.

“One of the first things a potential buyer will investigate is the financial performance of the business — a reliable financial history is a must,” Fu explains. “It can take a considerable amount of time to clean up your financial records so it’s best to stay on top of this.”

Be ready to explain the volatility of your financial performance as well as any normalizing adjustment to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), which may impact the valuation of your business.

Be prepared to take on the buyer’s due diligence with ease by being organized and having all your information ready.

 

2. Underestimating timelines and level of involvement

Be realistic about timelines — a sale could take months and the actual transition period post-sale could take years. Until the sale completes, you still have a business to run; prepare and expect to be involved but don’t neglect your business in the process.

Before you sell, complete any ongoing or major projects, especially those that improve the value of your business.

“It’s a fine balance determining the right time to sell but it’s always better to sell when things are going well,” says Fu.

It’s also important to take the market into account when you are selling. Is it a seller’s market? Is it a buyer’s market? Is it a crowded market? These are important questions to ask yourself, as the answers could all impact your timeline.

 

3. Not knowing your business’ worth

When selling your business, knowing your business’ worth is fundamental. Hire experts to get the best valuation and be involved in the process. You as the owner understand your business best and there may be qualitative factors that set your business apart from competitors.

Once you have an accurate valuation, run a competitive sales process rather than settling for a proprietary deal.

 

4. Managing the emotional side of the sale

“Attachment, especially to a business you have created and nurtured, is normal,” says Fu. “Leaving the fate of what you have built to someone else can be hard to do.”

Succession planning can alleviate these concerns when you are looking to sell. Identify key roles within your company and make plans to retain the right staff to support the new owner.

Being proactive in your succession planning allows for a smooth transition when you are ready to sell. With any transition plan, it’s important to:

·       Map out any key milestones during the transition period

·       Engage with primary stakeholders to provide assurance and minimize the risk of interruption

·       Identify gaps in your management team, especially those in charge of your financials

·       Anticipate potential challenges such as delays and staffing changes

The transition period could take up to twelve months or longer. Consider if you are willing and able to work with the buyer during this time, especially when there are earn-out clauses to be considered.

Better yet, sell to the right person. Do your research, pre-qualify buyers, and evaluate your options; you want to select a buyer that is good for the long-term prospects of the business.

 

5. Preparing your management team

A strong management team is important when it comes to succession planning and retaining top talent after the sale.

“Assess whether there are gaps in your management team and consider promoting from within to increase bench strength during the transition period,” Fu advises.

The stronger your management, the more likely they’ll take positions of greater responsibility during the selling process. Better yet, consider if the existing management team would be interested in buying the business — management buyouts are a common exit strategy and could make for a smoother transition.

Having a solid management team post-sale is also important. From a buyer’s support perspective, you want the management team engaged and dedicated to the business. Work with the buyer to develop a staff retention plan.

“From monetary incentives to communicating the future company vision, you want staff on-board from day one,” she says.

 

Fueling your next steps

At First West Capital, we help businesses grow, acquire and transition. Whether it’s launching new markets, merging with another business, or completing a management buyout, our team will work with you to fuel your business plan, while keeping you in the driver’s seat.

Have questions? Get in touch with us today.

 

Resources for today’s entrepreneur

Head to our insights page for a whole library of information for business owners, like you.

Learn more about:

·       How to sell your business in a crowded market

·       Tips for management buyouts

·       Business loan terms and financial jargon

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