Whilst every sale is different, there are several common traps to watch for when taking your business to market:

1. Overvaluing your business
2. Believing the broker
3. Failing to prepare in advance
4. Getting the timing wrong
5. Taking your eye off the ball

Are you overvaluing your business?

The most common trap would-be sellers fall into is overvaluing their business. You may have heard an anecdote about how much a competitor sold for, or what multiples are being achieved in your sector, but there are many factors to consider before you can properly assess what your own business might be worth.

Why this matters

The starting point is understanding the underlying profitability of your business, which can be very different from the profit reported in the accounts. We often see owner-managed businesses overestimate profitability because they haven’t factored in a market-rate salary for the owner’s time and expertise. Equally, reported profits may be flattering the picture because of below-market staff salaries or margins boosted by the sale of old stock. These are precisely the adjustments that emerge during due diligence and can have a significant impact on value.

At the same time, sellers can assume a buyer will pay for every potential synergy within the business. That might include the opportunity to increase prices that have remained unchanged for years or cost savings available through shared resources. Whilst buyers will be interested in those opportunities, they rarely hand over the entire benefit to the seller.

It’s also important to look beyond the headline figure. How much of the consideration will be paid in cash on completion? How much will be deferred or paid in shares? Is the acquisition being funded through debt within the acquired company? How achievable are any earn-out targets? And what protection do you have if the buyer encounters financial difficulties?

What to do

Commission an independent valuation early in the process. Understand the adjustments a buyer’s adviser is likely to make during due diligence, from market-rate remuneration to margin analysis, so that any challenges to value don’t come as a surprise later on. How you value the business and the level of risk you’re willing to accept on deferred or contingent payments can be very different from what a buyer is prepared to offer. An objective assessment at the outset helps establish realistic expectations.

Don’t believe the broker

Almost every business owner has received the email: “We have buyers in your area. Find out what your business is worth today.”

You get in touch, send over the latest accounts and have a quick conversation. Before long, you’re being told the business is worth more than you imagined and that now is the perfect time to sell. All that’s required is a signature, an onboarding fee, a retainer and a success fee.

Why this matters

Some brokers generate much of their income from onboarding fees and compensate for this by selling businesses quickly and in volume. As a result, many businesses sit unsold on their books and others are sold below their true potential value. Don’t become one of them.

What to do

Seek referrals, testimonials and recommendations before appointing an adviser. Look for an established and respected firm rather than signing an exclusivity agreement based solely on a promised valuation. A good adviser will provide an honest view of the business, explain the challenges as well as the opportunities, and guide you through the process rather than simply telling you what you want to hear.

Have you prepared for the sale?

If you want to sell your business today, ideally you should have started preparing several years ago. Whether that’s through a formal seller-readiness programme or a more informal internal process, a business should always have one eye on a future exit.

Why this matters

Buyers will scrutinise every aspect of the business. Customer concentration risks, weak margins, untidy financial records, outdated contracts and dependency on the owner can all affect value or derail a transaction entirely.

Time is often the enemy in a sale process. The longer a transaction takes, the more opportunities there are for something to go wrong.

What to do

Address the fundamentals well before going to market. Focus on strengthening pricing and margins, improving cash flow, reducing dependency on the owner, tidying systems and financial records, and ensuring contracts are current and fit for purpose. Working with experienced advisers can help identify potential issues before a buyer discovers them.

That way, when the right buyer emerges, market conditions are favourable or you simply decide the time is right, you’ll be in a much stronger position. Preparation shortens the process, and a shorter process generally carries less risk.

Are you timing the market right?

Timing matters. Your business needs to be ready, you need to be ready and the market needs to be ready.

Selling a business can be a significant emotional journey. For many owners, it’s a once-in-a-lifetime event and often the largest financial transaction they will ever undertake. It’s not something that should be rushed.

Why this matters

I’ve seen businesses forced into a sale, or even into liquidation, because circumstances changed and no exit strategy had been put in place when conditions were more favourable. Whether those pressures are financial, personal or health-related, a seller operating from a position of weakness is unlikely to achieve the best outcome.

What to do

Build flexibility into your exit planning. Start conversations with advisers long before a sale becomes a necessity. By preparing early, you give yourself options and the ability to act when conditions are right. If you wait until you need to sell, much of your negotiating leverage has already disappeared.

Don’t take your eye off the ball

It’s not unusual to see revenues soften, employees become unsettled and key customers drift away during a sale process. If that concerns you as the seller, it’s likely to concern the buyer even more.

Why this matters

A transaction demands a considerable amount of time and energy, but the business still needs to perform. It’s important not to lose sight of what is actually being sold: your customers, your people, your systems and your products.

Buyers will naturally test assumptions and seek to improve their position during negotiations. If business performance starts to decline, the pressure on valuation and deal terms only increases.

What to do

Continue running the business as though the transaction isn’t happening. Respond to buyer requests promptly, but don’t allow the process to dominate your time and attention. Trust your advisers, remain focused on performance and avoid becoming distracted by every twist and turn in the negotiations.

Transactions are rarely completely straightforward. However, businesses that are properly prepared and realistically valued are far more likely to achieve a successful outcome.

Selling a business is likely to be one of the most significant moments of your professional life. In my experience, the best outcomes are usually achieved by owners who prepare early, seek the right advice and remain focused on building a strong business throughout the process.

If you’re considering a sale and want to ensure you’re properly prepared, contact Simon Alderwick at simon.alderwick[@]shawgibbs.com to discuss how Shaw Gibbs can help.