1. Being too emotionally attached to the business.
Entrepreneurs who have built their businesses, often from scratch, describe their businesses as their “baby.” And it’s understandable, as you put so much of your life’s work into creating your business from the ground up. Gorochow points out that having those strong emotional bonds to your business can cloud your judgment, especially when you start to consider questions like: “Who will take care of this business like I do? Who will understand how to run this business like I do? What will happen to my legacy that I dedicated myself to building?” The solution, Gorochow says, is that you need to create some healthy distance so that you can look at your business more objectively, not unlike what you do when you send a child off in the world to be independent.
2. Not understanding how buyers evaluate their business.
Entrepreneurs who have built successful companies pride themselves on conceiving and delivering saleable products and services. But they don’t always understand how an investor might value their business. The fancy new downtown office that brings the owner great pride, for instance, might be perceived more as a liability to the value of your firm than an asset, and a strategic buyer might see that as a drag on profitability. Gorochow points out that the principal driver of the value of your business is the “predictability of the future cash flow the business will generate.” The more predictable those cash flows are going forward, the more valuable your business becomes.
3. Not understanding the importance of a committed management and leadership team.
One factor of selling a business that some owners overlook is who will run it when they’re gone. Will the good ones all take off the day after the closing and take critical knowledge and relationships with them, both internal and external? Some buyers might prefer to install new leadership; many are looking to acquire companies that will retain a strong management team after the sale is completed. A buyer will likely ask: can the company continue to generate cash even after you’re gone? That’s why it is critical to communicate with your team ahead of time to help ensure as smooth a transition as possible and have the right incentives in place like stay bonuses or other incentives, “golden handcuffs” to make sure they stay and that you are leaving a strong structure in place.
4. Not preparing for life post-sale.
The first question we ask our clients when they start talking about exiting is, what will you do after selling your business? Gorochow says: “Just having financial independence and flexibility does not lead to fulfillment.” While you might think you’re ready to play golf all day, Gorochow says that he’s had numerous clients quickly descend into boredom and a lack of direction. We had a client take off for a life of sailing in the Caribbean only to get bored and start a business all over again after 6 months of “living the dream.” The key is to plan ahead and consider new activities like charity work, mentoring, teaching, joining boards, or even starting a new business.
5. Not properly and thoroughly evaluating all exit options.
There are many ways to exit a business. Selling 100% to a third party is just one of several options. Alternatives include selling a partial or a minority ownership stake in the company to a third party, selling to your management team or your employees through an employee stock ownership plan or ESOP. The critical issue is to get professional advice, so you are aware of all the options and chose the option that aligns best with your long-term personal goals and the legacy you want to leave.
6. Not facing family issues head-on.
One major issue every family business needs to confront early on, says Gorochow, is entitlement. If family members feel entitled to certain positions or compensation, it can be challenging for the business founder to ever successfully exit. After all, trying to do what’s best for family members and what’s best for the business can often be at odds with each other. We recommend having the family members (especially the owner and spouse) write down a list of exit goals – separately. The challenge is to find the middle ground that leaves both feeling they will have a retirement they can look forward to. We see this issue very often with our clients, and its effects are not to be underestimated! Be sure that the family members involved are on the same page and ready for the change.
7. Not understanding and planning for the new economy.
Business models are constantly being disrupted. What was once a strong business, like owning a taxi company in a big city, is suddenly worthless with the rise of ride-sharing companies like Uber and Lyft. Business owners need to keep on top of how key trends in the economy—technology, environmental, cultural, and political—could disrupt your business not just today but in the future. We like to conduct a SWOT analysis with our clients regularly to anticipate these effects. This is especially critical if your valuation is based on future cash flows that are going to evaporate.
8. Not cleaning up bothersome contingencies.
Gorochow says that potential buyers of businesses hate two things more than anything: surprises and unknowns. The whole process of getting a business ready for sale involves de-risking the company. A seller needs to clean up as many “loose ends” inside the business as possible before considering selling. Think potential lawsuits, liabilities, employee claims, IRS issues, etc. At the very least, be prepared to disclose any of these issues to a seller ahead of time. Depending on the transaction, these may or may not be sold with the business, and in many cases, these can stall or even kill a deal.
9. Not understanding and planning for the new economy.
An exit is an emotional step, and many entrepreneurs have their lives closely tied to their business. For an exit to work smoothly and to obtain the highest sales price, owners need to be just owners and work “on” the business and not “in” the business as an employee. Unless, of course, they want to keep a job in the company after the exit. We agree with Gorochow that sellers need to start planning at least three to five years ahead of time to best position the firm for a successful exit.
10. Being overwhelmed by all of the moving pieces in an exit.
The 10th and biggest mistake that owners make when it comes to exiting their businesses, says Gorochow, is that they get overwhelmed by the process. As a result, “they just let things happen to them, have less control over the entire process, and settle for a less than satisfying exit.” The solution, he says, is to start the process at least 3-5 years ahead of a potential exit, build a plan, and finally, get support. He says: “You need a trusted team around you; consider engaging professionals who can guide you in building your plan and help you to quarterback the entire process.” That is where we can help. Give us a call if you want to discuss ways to make your business exit more profitable and rewarding; we’re only too glad to “quarterback” to process for you and bring in the team of professionals that you need.