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For many entrepreneurs, selling or transferring a business is like giving up a child they’ve raised since childhood.
Certainly, there is a lot at stake financially, given that 80% to 90% of owners have their financial assets locked up in their companies, according to estimates from the Exit Planning Institute, an education, training and creditworthiness organization. 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.
failure to plan
Many businesses do not have an exit plan or do not adequately strategize for multiple scenarios, said James Jack, who runs the Business Owners Client Segment at UBS Global Wealth Management. And it leaves them vulnerable in the event of a death, a divorce or if an asset like a private equity firm that’s hungry for a deal comes knocking. Fifty percent of exits in the US are involuntarily 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 at least once a year with advisors that may include CPAs, financial advisors, attorneys, and family members. If applicable, said Jack. They must also maintain an up-to-date business valuation.
Even with planning, it can take six to nine months to get from the point of starting a sale to starting a transaction with an outside buyer, says Scott Mashuda, managing director of River Edge Alliance Group, M&A advisor to businesses. he said. “Failing to plan is planning to fail.”
not involving professionals early
Some owners, who may be accustomed to the do-it-yourself approach, may attempt to do the same when it comes to selling or transferring their business.
But it is advisable to take this step without consulting outside advisors such as M&A experts, valuation experts, CPAs and lawyers, according to exit planning professionals.
Justin Goodbread, a certified financial planner and president of wealth management firm WealthSource, offers an example of a six-figure mistake that he — a seasoned exit planning professional — made in a recent deal. Had it not been for his outside advisors, he would have signed an official letter of intent that would have limited his tax-planning ability.
He said in email comments, “As a certified exit planning consultant, I am aware of all the essential steps to take when navigating a business sale. Yet, my eagerness to close the deal caused me to miss a step. ” “Because my attorney and CPA were involved, they were able to tell me to slow down, and we were able to transact in a more tax-sensitive manner,” he said.
Insisting that children are the next owners or not treating children as heirs
Many business owners plan to hand over their businesses to family — 44% according to an October UBS report. But, as the report points out, they aren’t always sure how the assets are to be divided or whether the heirs want the business.
Sixty-seven percent of the owners surveyed believed their successors would want the business and 33% thought their successors would be most interested in the asset from sale. However, among heirs, 52% claim they want a real business, compared to 48% who said they prefer assets from sale.
To help figure out what’s important to both parties and ensure that assumptions don’t get in the way of sound business decisions, Julia Carlson, founder of Financial Freedom Wealth Management Group in Newport, Ore., and The chief executive initially holds two meetings – one for the owners and the other for their children. He said, “Because if we all get together first, different things will be said.”
With the founders, she discusses their wishes for the future of the business and other financial considerations. Consulting with the children involves their ability and willingness to buy the parents and run the company. If joint ownership between siblings is an option, she assesses their ability and willingness to work together. Armed with this information, she brings the two parties together so they can begin taking the next step.
Not planning after sales
Planning for a sale or business transfer should also include understanding what’s next — whether it’s volunteering, traveling, starting a new business or something else, said Scott Snyder, president of the Exit Planning Institute. Whether the current founders are 40 or 65, it is important that they set their vision for the next step, he said.
For many founders, the business has been the biggest part of their lives for 20 or 30 years, and the emptiness can cause major emotional upheaval, including high instances of divorce and general dissatisfaction with life. “They often feel they have lost their identity,” Snyder said.
Being a Helicopter Business Owner
Because their lives are so entangled in the business, owners are sometimes involved for too long, which hinders the successor owner’s ability to flourish. This can often be true with family-owned enterprises. Carlson cites a real-life example of a patriarch who, a few years ago, decided to turn over the family business to his able and willing adult sons. However, instead of fulfilling this commitment, he continues to come to the office daily and micro-manage the sons’ business dealings, prompting them to consider starting their own businesses.
“Dad is so used to running the business for 40 years that he thought it would fall apart without him.” If things stay as they are, though, the inability to let go could cause businesses to crumble, Carlson said. “It’s as if business is just another child and can’t give enough space to see success on the other side.”