Key Highlights
- The number one reason business sales fail is that sellers take their foot off the gas and stop running the company with the same enthusiasm as prior to listing.
- Sellers commonly overestimate the value of their company leading to unrealistic expectations.
- Partnering with experienced California business brokers can help you keep your eye on your financials during the sales process and obtain maximum cash at closing.
Introduction
The three most common seller missteps California business brokers see are 1) sellers approaching a business broker with an over-inflated expectation of value of their business before listing their business for sale, 2) after listing their business for sale taking their foot off the gas and causing their value to falter in the middle of a transaction, and 3) poorly prepared financial statements.
This guide will walk you through the most frequent errors sellers make and show you how to avoid them, ensuring you can reach the finish line of your transaction with the maximum value and maximum cash at closing.
Misstep #1: Overestimating Business Value
Many business owners have heard through the grapevine what other businesses in their industry sold for or have received a generic estimation of value from their CPA, financial planner, or even perhaps friends. These generalized valuation ideas often result in inflated valuation expectations giving sellers a false sense of their business’s true value, causing them to overlook experienced business brokers who rely on proven, industry-vetted valuation methods and software.
Closed-minded sellers often list with a placating business broker who agrees to list at whatever price the seller tells them. These business brokers expect the offers to do the work in beating the listing into submission and wearing down the seller, often resulting in lower cash at closing position, than if the business had been listed at a reasonable price. Setting an asking price that is too high will result in minimal buyer activity, as it will scare away the more experienced and qualified buyers before they even inquire.
Common Valuation Mistakes Made by Sellers
Sellers often fall into a few traps when seeking advice as to the value of their business. Getting the value wrong information can doom the listing of your business and diminish your return.
Valuation is more than applying a single multiple to one number in your financials; it requires analysis of your business’s earnings over a few years, the historical consistency of the business performance, and various market risks. To avoid disappointment, be aware of these frequent mistakes:
- Ignoring Realistic and Reliable Market Comparable Data & Earnings Multiples: Failing to see what similar businesses have sold for relative to the size of your business.
- Using “Rules of Thumb”: Applying a simple “rule of thumb” multiplier to revenue or profit without considering industry nuances, historical consistency, and business-specific risks.
- Overvaluing Intangible Assets: Assigning a high dollar value to goodwill or brand name without concrete data to back it up.
Experienced business brokers can help you avoid these pitfalls. They ground the valuation in industry and lender-approved valuation methods.
How California Business Brokers Determine Accurate Value
So how do professional brokers arrive at an accurate listing price? Reputable California business brokers conduct a comprehensive and free market value analysis before ever listing a business. This analysis is an in-depth process that looks at your company using multiple valuation methods applied based on what your business warrants.
This process involves a deep dive into your financial statements to calculate your true discretionary earnings and EBITDA. Brokers then leverage their proven track record, valuation software, and access databases of thousands of sold businesses. This allows them to find relevant comparables.
By combining hard financial data, direct market comparables, and industry-specific knowledge, a broker can provide you with a realistic valuation. This data-driven approach removes emotion from the equation and positions your business to sell for the highest possible market price in a reasonable timeframe.
Misstep #2: Sellers Taking Their Foot Off the Gas After Accepting an Offer
Once you accept an offer, it can be tempting to mentally check out and coast for a while. However, a drop in financial performance during the listing of your business can result in the failed sale of your business. You must continue to run your business as if you plan to own it for another ten years.
Buyers and their third-party lenders will scrutinize your company’s performance right up until the day the deal closes. A dip in sales or profits will not go unnoticed and can jeopardize the entire transaction or significantly lower the final sale price.
If the buyers and lenders see declining sales, they will question the company’s health and future prospects. If the financials dip low enough, they will be forced to back out of the transaction completely or significantly re-negotiate the terms. Disengagement is the fastest way to undermine all the hard work from your prior sweat equity.
Impact on Third Party Financing
The vast majority of business acquisitions involve SBA financing, backed by the Small Business Administration (SBA). SBA lenders conduct their own thorough underwriting and due diligence, and a seller’s disengagement can be a deal-breaker. Lenders look at historical data, but they place immense weight on the most recent financial performance. Lenders require and review updated financial statements within 60 to 90 days of closing. If there is a significant downward trend it could cause the lender to disapprove the loan at the last minute.
At closing, the most recent financials will be annualized to determine if the business meets the lender’s minimum debt service requirements. Regardless of how far along in the transaction you are, if the financials at closing aren’t meeting the basic debt service requirements of the lender, the lender is required to pull out of the transaction.
Misstep #3: Incomplete Financial Record Preparation
Another major hurdle in selling a business is a lack of preparation. Before listing with a business broker, you must have minimum financial documentation for the business broker to value the business and to be able to complete due diligence. This means it is critical to compile all the necessary financial statements and operational documents that a buyer will want to see.
Working with experienced business advisors or a professional business brokerage from the start can help you anticipate these needs.
Organizing Financial Records and Documentation
Below is a table of essential documents you should have ready prior to listing your business:
| Financial Documents | Operational Documents |
| 3 Years of Tax Returns | Employee Roster & Contracts |
| 3 Years of P&L Statements | Key Customer & Supplier Agreements |
| 3 Years of End of Year Balance Sheets | Copies of Leases & Deeds |
| Interim Financials (Year-to-Date) | List of Furniture, Fixtures & Equipment |
Conclusion
Navigating the sale of your business requires organization and commitment. It’s crucial to keep operations consistent or growing, have organized documentation, and an accurate valuation. Partnering with the right business broker can make all the difference in ensuring a smooth sale with maximum cash at closing.
