Mistakes That Business Owners Make When Selling

Selling a small business is the last step toward retirement for many, and the funds from the sale become the core of retirement planning.

While owners know their businesses inside and out, they may struggle with the prospect of partying ways. We’ll discuss some common mistakes business owners make when selling so you can avoid the same errors.

Waiting Too Long To Prepare

The worst mistake when selling your business is failing to think about selling until your hand is forced. It can be difficult to consider parting ways after years of hard work, but you should plan the eventual sale and transition before the time comes.

Long-term planning for selling a business has many benefits, including selling when the practice reaches its peak market value. 

Owners should also consider a succession plan of selling to employees in an Employee Stock Ownership Plan (ESOP). For many owners, an ESOP takes the stress out of selling the business because it enables a smooth transition to trustworthy buyers.

Failing To Understand the True Value

Many business owners tend to undervalue their practice before soliciting purchase bids. Owners often do a simple EBITDA valuation (Earnings + Interest + Taxes + Depreciation + Amortization = EBITDA) and use that as their primary source for their business’s market value.

While this valuation can be useful, it’s far from the whole picture. This formula doesn’t account for geographic location or the strategic value of the business to the buyer. 

Remember, a private practice’s value is what one person is willing to pay for, so paint a picture for the buyer of your business’s value and future.

Not Reducing Tax Exposure

Owners selling their businesses must consider taxes, but they often neglect or ignore them throughout the sale, costing the owner a substantial amount. 

Business owners should avoid the common tax pitfalls when selling a private practice, particularly the short-term capital gains tax.

Changing the structure of the sale from an asset sale to an entity sale can significantly reduce the tax exposure for the seller and save money. 

While an asset sale is the sale of every asset in the company, an entity sale is more beneficial to sellers. It includes liabilities and is just on tax hit instead of a thousand asset tax paper cuts.

Not Involving Professionals

A critical mistake many business owners make when selling is believing they can do everything themselves, like finding a suitable buyer. Transition brokers and consultants can make a significant difference in the purchase price and the speed of the sale.

Brokers have experience and connections in the community and industry of your business and are much better at sorting through serious buyers from pretenders. 

It may seem beneficial to do it yourself and pocket the commission fee, but the process will likely take longer, and the final purchase price will be lower than you hoped.