5 Mistakes to Avoid During Exit Planning
“Do You Need a Business Broker?” One reader asked after a rather strong argument that many brokers are charging outrageous commissions for little service.
At last, you are ready to sell your business.
And that’s likely a welcome event: Selling an online business is an attractive prospect for many business owners; but if you’re the seller and your exit strategy lacks forethought and cohesion, you could end up making mistakes that cost you.
Here are five mistakes to avoid during exit planning.
1. Failing to understand what makes your business valuable
Remember that buyers will not have the same emotional ties to the business that you do. They are going to be taking a more objective stance when deciding whether to invest or not. If you’re looking to sell the business for more than what it’s realistically worth, you’re going to have a hard time finding a buyer.
Here are some of the main factors driving value in an online business:
Your earnings. What is the annual net profit of your business? If you haven’t been keeping extensive financial records of your business, there could be some major hiccups in the selling process. A 12-month track record is considered standard.
Your traffic. Without traffic, an online business will not survive, let alone thrive. Although the quantity of traffic is important, the quality of traffic is even more critical. If the people coming to your website are bouncing right off or not converting, the number page views you’re getting doesn’t matter.
As with financials, you should have at least a 12-month record of your traffic.
Legal factors. Are there any potential trademark or copyright-infringement issues? There’s a good chance a buyer will walk away from the deal if he or she detects a potential legal minefield.
Other factors will affect your valuation, depending on your exact business model. For instance, if you’re looking to sell a Fulfillment By Amazon or FBA business, investors will also be evaluating: your suppliers, products, product mix, competition and so on.
2. Not taking steps to make the transfer as easy as possible
How transferable is your business? If it can’t be handed over with ease, it will prove hard to sell.
The following elements should be scrutinized:
Reliance on the owner. Are you the face of the company? Does the business rely heavily on your involvement? This could make the transfer difficult.
Owner responsibilities. How many responsibilities do you have? How much work do you have to do on a daily basis? Calculate your hourly wage based on your involvement. If the number is too small, there aren’t too many people that are going to be interested in taking over your business.
Documentation. Is your business adequately systematized? Are all tasks and procedures documented? Handing over your business to the new owner will prove much easier if people’s responsibilities and tasks are clearly laid out for the buyer.
Location dependence. How reliant is your business on a physical location? You can lessen location dependence by hiring remotely and streamlining communication.
Specialized knowledge or skills. Do you possess any unique skills or knowledge required to run the business? If so, are you willing to train the new owner to gain these skills?
3. Failing to determine your reason for selling
Many owners fail to think about why they’re interested in selling their business. Money can actually cloud the decision and make it harder to see the bigger picture, meaning other reasons for selling and not selling.
The Young Entrepreneurs Council (YEC) recently posted on the Verge blog the article “15 Mistakes Entrepreneurs Make When Deciding on an Exit Strategy” and asked a number of young entrepreneurs their thoughts on that subject.
Jesse Lear of V.I.P. Waste Services, LLC said that business owners don’t always have a long-term view of their business, which can lead to poor decision making in exit planning. For example, if financial security is your goal, it may be possible to scale your business to the point where it’s earning considerably more than it is now. Furthermore, you could end up enjoying your involvement with the business, if you aren’t already.
Some entrepreneurs end up regretting the sale of their business, even if they’re receiving liquid cash to put into a new venture. The key point is that you need to know why you’re selling. If your business can run without you, if you have health- or family-related reasons for exiting or you have another opportunity to pursue, then this might be a good time to exit.
4. Not taking enough time to prepare
The sales process tends to go smoothly when a seller has taken an adequate amount of time to prepare for the sale. This can vary depending on the business, but anywhere from 18 to 24 months of preparation is not uncommon.
Also speaking with the YEC, Kim Kaupe of ZinePak warned entrepreneurs against rushing into the sale because it may be possible to build your business far beyond where it stands now, increasing its value in a substantial way.
Andrew Schrage of Money Crashers, personal finance, meanwhile, told YEC business owners should make sure that procedures have been documented and to prepare their staff for the handover.
There are a lot of things to be thinking about as you begin planning your exit. If you put your effort into making the operations airtight, the buyer is going to be much happier with the purchase. You’ll also have a better chance at selling the business at your desired price point.
5. Failing to keep your options open
Murray Newlands of Due.com emphasized to YEC the sentiment that you shouldn’t necessarily take the first offer for your business.
Word is going to get out that your business is up for sale, assuming you have a proper marketing strategy in place or you’re working with a qualified broker. More offers can drive up the demand and help you to get more for your business.
Not all offers are going to be to your benefit either, so it’s best to take the time to evaluate what’s on the table. This will prevent you from making bad decisions you can’t reverse.
Learning how to value an online business is an invaluable process for business owners. In this way, you can get inside the heads of your prospective buyers and be aware of what they’re looking for as they assess your business from every angle. Putting yourself in their place can help you create a more saleable business and earn more from the transaction.