The biggest mistakes owners make when selling their business

For many entrepreneurs, selling or transferring a business is like giving up a baby they’ve raised from a young age.

Certainly, the economic stakes are high, given that 80 to 90 percent of owners have their financial wealth locked up in their business, according to estimates by the Exit Planning Institute, an education, training and accreditation body. Many owners also underestimate the many emotional aspects that go along with exiting a business.

Here are five mistakes owners should avoid when selling a business.

Many companies don’t have an exit plan or develop an adequate strategy for a multitude of scenarios, said James Jack, who leads the business owner client segment at UBS Global Wealth Management. And that leaves them vulnerable in the event of death, divorce, or if a suitor, like a private equity firm looking for a deal, comes knocking. Fifty percent of exits in the United States are involuntary due to death, divorce, disability, distress or disagreement, according to the Exit Planning Institute.

To avoid scrambling or being forced to accept a lower purchase price, owners should plan a scenario at least once a year with advisors including a CPA, financial advisor, attorney and members of the family, if any, Jack said. They must also maintain an up-to-date business valuation.

Even with planning, it can take six to nine months to go from initiating a sale to closing a deal with an outside buyer, said Scott Mashuda, managing director of River’s Edge Alliance Group, an advisor in mergers and acquisitions for companies. “Failing to plan is planning to fail.”

Some owners, who might be used to DIY, might try to do the same when it comes to selling or transferring their business.

But taking this step, without consulting outside advisors such as M&A specialists, valuation experts, accountants and lawyers, is ill-advised, according to exit planning professionals.

Justin Goodbread, certified financial planner and president of wealth management firm WealthSource, gives the example of a six-figure mistake he – a seasoned exit planning professional – nearly made in a recent trade . Were it not for his outside advisors, he would have signed a formal letter of intent that would have limited his tax planning ability.

“As a Certified Exit Planning Consultant, I know all the necessary steps to take when selling a business. However, my rush to close the deal caused me to miss a step,” he said. he stated in comments via email. “Because my attorney and my CPA were involved, they were able to tell me to slow down, and we were able to transact in a more tax-sensitive way,” he said.

Many business owners plan to pass their business on to their family – 44% according to an October UBS report. But, as the report illustrates, they don’t always know how to distribute the assets or whether the heirs want the business.

Sixty-seven percent of owners surveyed thought their heirs wanted the business and 33% thought their heirs would be more interested in the assets from the sale. Among heirs, however, 52% say they want the actual business, compared to 48% who say they prefer the assets of the sale.

To help clarify what’s important to both parties and ensure assumptions don’t get in the way of sound business decisions, Julia Carlson, founder and managing director of Financial Freedom Wealth Management Group in Newport, Oregon, is initially hosting two meetings – one for owners and the other for their children. “Because different things will be said if we all meet first,” she said.

With the founders, she discusses their desires for the future of the business and other financial considerations. Consultations with the children focus on their ability and willingness to redeem the parents and run the business. If co-ownership between siblings is an option, it assesses their ability and willingness to work together. Armed with this information, she brings the two parties together so they can begin to take the next steps.

Planning for a business sale or transfer should also include understanding what’s next — whether that’s volunteering, traveling, starting a new business or something else, Scott said. Snider, president of the Exit Planning Institute. Whether the outgoing founders are 40 or 65, it’s critical that they determine their vision for what’s next, he said.

For many founders, the business has been the biggest part of their life for 20 or 30 years, and the void can cause major emotional upheaval, including more frequent divorces and general dissatisfaction with life. “They often feel like they’ve lost their identity,” Snider said.

Because their lives are so intertwined with the business, owners sometimes stay involved too long, which hampers the successor owner’s ability to thrive. This is often the case with family businesses. Carlson offers a concrete example of a patriarch who decided a few years ago to hand over the family business to his capable and strong-willed adult sons. Instead of keeping that commitment, however, he continues to come into the office daily and micro-manage the sons’ business dealings, leading them to consider leaving to start their own businesses.

“The father is so used to running the business for 40 years that he feels like it’s going to crumble without him.” If things stay as they are, however, the business could crumble due to its inability to let go, Carlson said. “It’s like the business is another child and he can’t give enough room to see success on the other side.”