For most entrepreneurs, the ultimate goal is to sell their business and move on to new opportunities. However, the process of selling a business can be complex, and many owners unknowingly make costly mistakes. Avoiding these mistakes can make a significant difference in the outcome of your sale. Here are six of the most common mistakes business owners make when selling their business:
1) Failing to Plan Taxes Before the Letter of Intent (LOI)
One of the biggest oversights I see is failing to plan for taxes until the sale process is almost finished. Many owners think they can handle tax planning once they know the sale is imminent, but this isn’t the case. Once the LOI is signed, you lose the chance to implement critical tax-saving strategies, such as transferring shares into trusts, donating them to a donor-advised fund, or stacking QSBS (Qualified Small Business Stock) benefits. It’s crucial to start your tax planning well before the sale is in motion to maximize your savings.
2) Selling Too Soon
A common mistake is selling the business at the first offer. It’s tempting to take the money and run, but often the first offer isn’t the best one. Many business owners are too quick to sell without realizing that a few more years of growth could significantly increase the business’s value. Take your time to evaluate whether selling now is the right decision, and don’t rush into it. You only get one chance to sell your business, so make sure it’s done right.
3) Selling to the Wrong Buyer
When it comes to selling your business, the highest offer isn’t always the best option. It’s easy to get fixated on the financial aspect, but selling to the wrong buyer can lead to frustration and regret. I’ve seen owners who sold part of their business and ended up hating the management dynamics, especially when they were expected to stay on after the sale. It’s essential to consider the buyer’s compatibility with your business and how their involvement will affect your future. Always look for the right fit, not just the highest bidder.
4) Trying to Sell Alone
Navigating the sale of a business without professional help is a major mistake. If you don’t have a team of experts supporting you, you risk losing leverage to the buyer’s team, who will likely push to lower the business valuation. For example, I worked with a business owner who thought their company was worth $80 million, but their financials were poorly organized, which made it impossible to tell a compelling story. As a result, offers came in closer to $30 million. After hiring a better financial team and improving their records, they were able to secure a $70 million offer. The takeaway? Invest in solid financials and professional advice early on.
5) Running Personal Expenses Through the Business
It’s tempting for business owners to run personal expenses through the business to reduce taxable income, but this strategy can hurt more than it helps. While it might seem like a way to save on taxes, it actually lowers the company’s profitability and, in turn, its valuation. To maximize the value of your business during the years leading up to a sale, ensure your financial records show the highest possible profit. Avoid using the business as a personal expense account to save on taxes—it can backfire when you’re ready to sell.
6) Overlooking the Structure of the Sale
Many owners rush to sell without considering the structure of the deal. Whether you’re selling through an installment sale, asset purchase, or equity sale makes a huge difference in how you are paid and how you’ll be taxed. For example, some deals require you to roll part of your equity into the new company, which can be risky. I’ve seen situations where a business owner rolled 50% of their equity into the new company, only for it to fail within two years, resulting in a loss of over $20 million. Think carefully about the long-term implications before deciding on the sale structure.
Conclusion
Selling your business is a major decision, and it’s easy to make mistakes if you’re not prepared. By avoiding these six common mistakes—starting tax planning early, not rushing the sale, choosing the right buyer, seeking professional help, keeping personal expenses separate, and carefully considering the sale structure—you can ensure that you get the best outcome possible. Take your time, plan ahead, and make the sale of your business a success.
