Article Summary of How To Avoid This #1 Mistake When Selling Your Business:
- Stepping Into the Mind of Your Buyer
- Should I Build or Buy?
- The Worst Deal You Can Take
How To Avoid This #1 Mistake When Selling Your Business
What one habit separates top-performing athletes and teams from second-tier competitors?
Take a minute to think of an answer.
I’ll give you a hint:
It has nothing to do with practice, on-field performance, equipment, or individual skill (despite what you might think about an All Time Great like Tim Duncan).
Let me explain. In any competitive endeavor, from sports to business, people compete against each other.
A sport like basketball is a battle of wills. Timothy Theodore Duncan and other greats on the San Antonio Spurs wanted to win and so they practiced, created tactics and strategies for how to win. For each team they play against, the team sits down and works out exactly how the other team plays, the strengths and weaknesses. They use this information to adjust their game to a very fine detail.
I talk to small business owners on what seems like a daily business who forget the golden rule of selling your business: Your business is only worth what someone will pay.
The #1 Mistake To Avoid When Selling Your Business
The biggest mistake business owners make time and time again is a failure to consider how a buyer views the business. This happens so much that I wrote about it over on my personal blog, Michaelpalomo.com.
Look at your company through the eyes of a prospective buyer.
I can’t say this enough.
Every mistake a business owner makes when selling comes from forgetting to consider the buyer’s perspective. And those mistakes can add up to thousands or millions of lost returns.
Step Into the Mind of Your Buyer
Throughout my career, I’ve bought, sold, owned and operated many different businesses Entrepreneurship is in my blood. I have a unique perspective as a buyer, seller, and operator.
Many first-time owners get caught up in the sales process, with a goal of a lucrative sale and dreams of a beach house in the Florida Keys. Sadly, they fail to realize that the transition to selling the business requires a strategy adjustment. Yes, the business needs to continue to function, but the part of the focus needs to shift to how potential buyers see the business. Easier said than done.
Two understand a buyer we should understand two key elements of the buyer. These elements will help us understand their motive in the sale, and what sale particulars we can expect. They are:
- Buyer’s Market Strategy — Should I build or buy?
- Buyer’s Purchase Rational — Is this a financial sale or a strategic sale?
Understanding these two aspects of buyer behavior will help you avoid a crushing mistake owners make when selling the business, one that leads to tremendous profit loss.
Should I Build or Buy?
Well before a buyer approaches you, they are going to consider whether or not they can build your business cheaper than they can buy it. The buyer wants to know if they can replicate your business and successfully compete. Entrepreneurs and investors self-select here, as the former may be more inclined to put the work in to compete, while the latter will prefer to buy.
This is a complicated decision. The buyer will review the market, evaluate the technical and financial costs of duplicating your business, and will assess the likelihood of launching a successful competition bid for revenue. If a buyer evaluates that a purchase will be more costly than competing, they may opt to compete.
Competition here is not good. You want your business to command a premium that buyers recognize is too expensive to duplicate, yet one they can and will pay. I recommend business owners considering an eventual sale pour time and energy into creating a highly differentiated product or service. Don’t spread the business thin building a set of loosely differentiated products and services that are easy to replicate.
The goal here is to consider your business from the perspective of a potential buyer. How hard is it to duplicate your business? Are your products/services differentiated sufficiently? Are there enough barriers to keep competitors from entering?
Is This a Financial Sale or a Strategic Sale?
Let’s say you’ve created a business that offers a well-differentiated product/service that is hard to recreate. You’ve created enough barriers to entrants, and are confident that your business is appealing to buyers. Next, you need to determine the type of buyer approaching you.
Your average entrepreneur (whether or not they run a small or large business) will likely consider a strategic sale. They may run a competitor or related business, and can often pay a much higher multiple than an investor.
In comparison, investors may be looking for a financial sale. Financial sales don’t often pay as much and usually, investors purchase a portion of the business, keeping the ownership structure in place with an equity tranche.
Of course, some buyers may be a mix of the two. Your goal should be to understand the buyer’s goals, so you can predict the level and type of offers that may come your way.
The Worst Deal You Can Take
Buyers will naturally try to shield their goals from a seller. Uncertainty is part of the game, as each party is usually trying to make the most of a sale.
Understanding your buyer’s motives may help you avoid a deal that seems good upfront, but that often results in a poor sale. This is the proprietary deal.
A proprietary deal is one where a business owner is approached by a seller, given a low offer, and the owner accepts without looking into alternative offers. This deal happens for several reasons, which include a failure to understand buyer motives and a low estimation of the value of the company.
This can be countered by developing what I touched on earlier: A thorough understanding of the buyer’s motives and approach to the market. Don’t let this happen to you.
If you are considering a sale and want to better understand your company’s value and your buyer, contact me. I can help you sort out the best way to profit from selling your business.