Michael Bosma: 8 mistakes to avoid when selling your business (Voices)
Covering Your Assets
Here are the crazy eight mistakes you make when you sell your business:
8. You never scrub your fixed asset list
Many reading this article have recently filed their personal property declaration with the county assessor.
The mistake is innocent enough; you report the current year additions on the declaration. You give this same list to the buyer. You make a representation that all of the assets will be transferred to the new owner. If you look at the detail, you might ask yourself if the “new” computer you bought for Y2K is still around.
Also, make a mental note that assets that have been disposed of carry a residual value for property purposes, so you are probably overpaying that tax. The problem in the sales scenario is the buyer will want to know where all these hard assets are after close. Scrub the schedule to ensure there are no post-close squabbles over the 20-year-old computer.
7. You don’t document your procedures
Many business owners have of their “institutional knowledge” packed securely between their ears. The owner has been doing the business for so long, it is second nature.
The problem is that the owner will be “retiring” after their obligatory transition period. Creating documented standard operating procedures will give a prospective buyer comfort that you took the time to reduce your procedures to writing to ensure they have a reference when they run into problems in the business.
The mundane things need to be documented. The most prevalent things are business passwords to QuickBooks, etc.
6. You have handshake deals with your customers
Buyers want comfort that sales will continue when the current owner sells. Customers are willing to work with the new owner, but don’t want surprises.
Lack of contracts with your customers create the potential that the buyer will send out an invoice that might have the customer reconsider the relationship.
5. You rely too much on word-of-mouth advertising
Many owners count it as a badge of honor that they don’t advertise. The problem is that the buyer is just entering the business vertical, and does not have the same reputation and relationships. Having a documented advertising plan gives the buyer comfort that as they continue to advertise, the business will continue to grow.
4. You run all your personal expenses through the business
The reality is that buyers fear overpaying — not necessarily because they are cheapskates, rather they understand that repaying their loan to buy the business is predicated on the profits to do so.
Sellers are convinced that every expense is now tied to their compensation and add back the expense to calculate the owner’s discretionary earnings. It’s better to not run all these expenses through the business so the buyer can get a clear picture of how the business operates.
As a side note, many buyers question a seller’s integrity when they are running truckloads of questionable expenses through the business. It speaks to the character of the seller.
Better to err on the side of caution. Honesty is, after all, the best policy.
3. You wait too long to sell your business
Business owners believe that since many people have inquired about buying the business over the years, there will be a line of suitors when the seller finally decides to sell.
Also, when an owner is “done,” they really become disengaged, and start engaging in other pursuits. Savvy buyers want the seller to be around and available for 3 to 12 months. Don’t check out too soon. The buyer needs your expertise!
2. You don’t have accurate, GAAP-based financial statements
Standard representations include statements that the financial statements are accurate based on GAAP (generally accepted accounting principles). Inter-period accruals are commonly overlooked, resulting in purchase price adjustments, much to the seller’s chagrin.
For example, if the close happens on a day in the middle of a pay period, the wages that have been earned but unpaid should be expensed, and result in a liability recorded on the balance sheet.
If these accruals had been recorded in the prior period, the required working capital would have been decreased. The net effect is the seller writing a check to the buyer for the amount of these unrecorded accruals.
1. You are not committed to the buyer’s success
My counsel for sellers is to be unequivocally committed to a buyer’s success (as defined by the buyer). I get it — sellers are now working for the buyer. Sellers are typically poor employees, all opinionated and whatnot.
Communicate regularly with the buyer and check your ego at the door. It’s not about you, and the best transactions are defined by sellers being willing to set their ego aside for the benefit of their customers and employees. If the buyer fails, it is the failure of the seller. Own it.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. Reach him for comment at firstname.lastname@example.org.
“We did a lot of very, very difficult evaluation over a very, very short amount of time and just concluded that this was the right thing for the company at large.”