Although entrepreneurs have become more business-savvy in recent years, many still fall short when it comes to avoiding critical mistakes that could prevent them from selling their company.
Pricing a business based on the total profits earned, but then failing to report all profits in the company’s financial statements is one of the biggest mistakes that entrepreneurs make.
“You can’t really have it both ways,” says Peter Siegel, founder of BizBen.com, a business-exchange Web site. If you “collected that extra $20,000 last year...you need to show it on your books. And, of course, pay taxes on that profit. Then it is legitimate to include in the calculations performed to arrive at a suitable market value for selling a business.”
Instead, what some business owners do is keep the amount of profit hidden, but use that amount to calculate the selling price.
“It’s not cool to tell prospective buyers about the amount of money you’ve been skimming off the top,” Siegel says. “The buyer figures if you’re trying to put one over on the IRS, it’s not likely you’re telling the truth when dealing with possible purchasers.”
Another critical error that entrepreneurs make is dealing with several business brokers instead of just one. It’s understandable that a seller wants to reach as many potential buyers as possible, but using an “open listing” rather than an exclusive contract with one broker could backfire, Siegel says.
With an open listing, the seller is obligated to work with the broker only if that person brings in a client who actually buys the business; otherwise, the seller can make a deal for the company himself.
“The problem is that brokers usually work only on their exclusive listings. That’s where they invest their time and advertising dollars. The open-listing clients get little, if any, attention,” Siegel says.
“And by authorizing a bunch of brokers to introduce a company to prospective buyers,” he continues, “the seller is giving up control over the process. Among other problems, that often leads to the seller’s request for confidentiality ‘going out the window.’ ”
As chief executive of BizBen.com, Siegel says the advice the site offers to small- and medium-sized business owners, through books and articles, helps entrepreneurs recognize and correct bad habits, in hopes of improving their chances of a successful sale.
The “purpose of posting the worst examples of mistakes when selling a business is to remind sellers that they’ll incur unnecessary problems and risks when they deviate from solid business practices,” Siegel says.
For more information on buyers and sellers of small- and mid-sized businesses, visit the Web site at BizBen.com.