Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, May 1, 2012

Common Mistakes in the Sale of Business and How Advanced Planning Can Fix Them

Unknown-1Boomers have their wealth tied up in businesses they own and the owners are not prepared for when the time to cash out comes. Some have not determined how much their business is even worth, and others undermine their company’s value because they can’t let go. It is important to plan in advance for the sale of a business in light of the economic uncertainty today. The Wall Street Journal shares some advice from financial advisers and exit-planning specialists on common mistakes that business owners make, and how to avoid those mistakes:

  • Mistake #1: Creating a business that is too dependent on the owner. If too dependent on the owner can hinder the company’s sale price because buyer’s perceive more risk.

Fix #1:This can be fixed by delegating responsibility well before selling the business so that there will be a smooth transition.

  • Mistake #2: Ignoring Tax Benefits of Planning Ahead

Fix #2: If you anticipate transferring ownership within five years, do it sooner at a lower valuation.

  • Mistake #3: Incorrectly Valuing the Business

Fix #3: Way before you intend to retire, get a realistic appraisal of the business to see if it will yield what you need to retire. If it will not, then adjust retirement plans, or come up with a strategy to boost your income.

  • Mistake #4: Rushing to Accept a Rich Number – high bids could be misleading.

Fix #4: Try to anticipate how the due diligence the buyer is undertaking could effect the closing offer. Furthermore, consider all aspects of the transaction.

  • Mistake #5: Hiring Your Brother-in-law to do the deal

Fix #5: Don’t try to keep everything in the family. Interview several firms when you start thinking about selling your business. Ask how they would structure a deal, how they could negotiate, and how they could make a quick close.

  • Mistake #6: Underestimating the Emotional Impact of Selling a Business – because your purpose can be wrapped up in that business, that attachment can cause you to act irrationally.

Fix #6: Map out your post-exit lifestyle before a sale. One exit-consultant recommends that clients fill out a calendar with how their going to spend each day for up to a year after the transaction goes through.

See Veronica Dagher, Preparing to Leave, The Wall Street Journal, Apr. 29, 2012

 

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