Recently, a group of successful young entrepreneurs was interviewed to find out what they consider to be mistakes that many entrepreneurs make when they sell their business.
If you are planning on making an exit from the business you’ve worked so hard to build, you’ll want to take a look at some of the advice given by these entrepreneurs.
Knowing about them can help you avoid them before you start the process of selling your business.
Here are 14 mistakes they’ve identified and how you can avoid making them yourself.
Mistake #1 – Trying to Make a Quick Exit
It’s easy to get excited about the possibility of making an exit from your business and then try to force the process to happen sooner or faster than it really should. Planning your business exit is important and you shouldn’t rush it.
Think about Facebook, as an example. If Zuckerberg had taken the first offer that was sent his way, Facebook quite possibly may not have become the goliath it is today. If he would have rushed to make an exit, billions of daily users may have never come to fruition.
Instead of trying to get out as quickly as possible, take a long-term view what it takes to keep your business growing.
Mistake #2 – Not Understanding Cash vs Earnouts
There’s usually going to be two different scenarios after a buyer has purchased your business.
They are going to require you to give them assistance as they’re transitioning into taking over the business and this could dictate how they’re willing to pay you to buy it.
The first scenario is where they pay the entirety in cash, up front. The second is considered an earnout and structures payments based on the performance of the business.
The first scenario is where you’re going to want to focus if you’re trying to get out of the business quickly.
The second scenario creates situations that are out of your control because the remainder of what the new investor owes is due when the business has hit certain performance goals they have set out to achieve.
That means you’re going to be on the hook to make sure those goals are hit and the new owner could be completely rubbish at running the business. This would mean you would have to keep it floating in order to receive the rest of your money.
In general, earnouts are bad for you as a seller and getting cash up front is the only way to guarantee you’re getting the entire payout. You can offer assistance after the sale, but don’t let your money be tied to outcomes the buyer has control over.
Mistake #3 – Giving Up the Wrong Type of Shares
When you were first building the business, you may have given certain types of shares to your investors, employees, advisers and other people that were critical in your business to where it is today.
Depending on the type of shares you’ve given out, you could be hindering your ability to actually make an exit because of so many loose ends with your shareholders.
To avoid screwing yourself out of being able to make an exit, you’ll want to avoid giving out too many shares and bringing in too many outside parties that are going to end up being a part of the exit when it finally happens. This is one of the main reasons why you want to be planning your business exit.
Mistake #4 – Letting Others Pressure You into Bad Decisions
investors that you’ve taken on while you were growing the business are going to play a large role when it comes time for you to sell the business off.
You could be making a mistake by placing too much weight on their opinions, especially when it comes to cashing out when you feel the time is right.
Other times, those same investors will be pressuring you to sell off the business before you have hit the goals that you’ve set for the growth of the business. They’re more concerned with a fast return on their investment instead of a larger potential upside down the road.
If you have investors that aren’t wanting to wait, you may want to consider buying them out so you can focus on selling the business when you decide the time is right without so many others being involved.
Mistake #5 – Not Thinking About Your Lifestyle
When you’re thinking about making an exit and planning your business exit, chances are high that you’re only thinking about how much money you can make from the sale.
Very few entrepreneurs actually take their lifestyle into consideration.
After all, you started building the business because it was something that you loved to do, but what happens when you have all this extra free time on your hands and a pocket full of cash?
What are you going to do, then?
Do you have another project you would like to start? Are you prepared for the loss of the regular stream of income the business was providing you? Will you miss working on the business?
Your lifestyle both before and after the sale is something else you’ll need to consider.
Mistake #6 – Being Afraid to Reach Out to Competitors
Entrepreneurs tend to look at their competition in only one way — competition.
What if your competitors were one of the best sources you could have when you decide you’re ready to sell off your business?
If your competitors are relatively the same size or larger than you, you could get even more value from the sale of your business than you would get by selling to an investor.
Your competition already knows how profitable the industry can be and they’re likely going to be more than happy to remove you from the marketplace.
Your competitors will want to buy your business either to merge it into their own or to create an additional way to attack the market.
If you do reach out to them, you’ll want to avoid divulging proprietary secrets, at least until you have an offer on the table. Just letting them know that you’re interested in selling can be a great move on your part.
Mistake #7 – Not Thinking Ahead
Regardless how or when you intend to exit from your business, you’re going to end up going through due diligence processes when you’ve got a buyer interested. This is obviously the main benefit of planning your business exit.
During this process, it would be best to have a reputable broker on your side and perhaps even an attorney that has experience, so they can make sure you’re protected.
Knowing how the due diligence process works before you get into it can make the process go far more smoothly. Don’t scramble at the last minute to dot your I’s and cross your T’s.
Mistake #8 – Not Training Key Team Members
One fatal mistake many entrepreneurs make is building the business around themselves.
Instead of hiring key people to help them sustain and grow the business, they’ve taken on every aspect of the business themselves.
This creates a situation where investors will shy away from making an offer because they wanted to gain a revenue-generating asset, not purchase a whole job for themselves.
If you haven’t already, start hiring key people that you can delegate to. Your buyer will thank you for it. Your business is going to be far more attractive when they know that they don’t have to devote large amounts of time toward sustaining the business once they’ve bought it.