10 mistakes to avoid when planning a business transition

Most business owners are immersed in the daily responsibilities of operating and growing their companies. They often don’t have the time to think ahead or prepare for what happens when they are ready to transition out of the business. As an investment banking firm, we frequently talk about the thing business owners need to do to prepare for that next phase, but there are also things they shouldn’t do when considering a business sale or other type of transition.  

 #1 Don’t Try to Time the Market 

Professional investment advisors with clients investing in public stocks generally advise them to avoid trying to time the market in their buy/sell decisions. Moreover, these are usually highly-liquid stocks where a trade happens within moments after it is requested. It is even more challenging to try to sell a private company at the “top of the market.” First, the process is much longer — typically in the range of 6 – 24 months from the start of the process. Two, there are many more nuances to negotiate in a business transition than in the sale of a public stock. Plan to sell while the company value is growing vs. trying to time the sale for the peak. There are ways to capture the value of the continued growth after the sale, and you avoid the risks of market timing. 

 #2 Don’t Neglect the Business 

We have witnessed many business owners begin to ignore their businesses after making the decision to transition or sell. They begin taking more and more vacation time, stop meeting with customers regularly, lose focus on growing revenue and controlling expenses, and begin distancing themselves from the business. This can lead to the business stagnating, sometimes with revenue and profitability even declining, which in turn impacts the value of the company. 

 #3 Don’t Defer Planning and Preparation   

Things that may not seem important to an owner now can be very important to a buyer. For example, make sure agreements with customers and vendors are up to date, signed and available. Be certain that any patents or other intellectual property rights are in order. Trying to resolve these things in the midst of due diligence is a recipe for disaster, can result in significant delays or sometimes result in a failed sale or impact the value of the company. 

 #4 Don’t Announce or Share Your Plans 

Confidentiality is important! We advise our clients not to tell employees, vendors, customers, or others that the company may be transitioning until late in the process. Broadly communicating a transition before it is a definite can lead to loss of employees, loss of customers, can disrupt the business and ultimately lead to lower valuation. It is best to share this information with a very limited group and work with key advisors to determine the best time to share the information more widely. 

 #5 Don’t Delay Correcting Financial Reporting Issues 

One of the most common mistakes we see! As a business owner, do not wait until the year you are planning to transition to correct prior financial reporting issues such as ensuring that inventory is accurately reported, equipment and other fixed asset lists are complete and up to date, upgrading the level of financial reporting to at least a review level with footnotes, and generally improving the overall quality. Bad financial reporting can delay or kill a deal, and uncertainty about the validity of your numbers may result in a lower purchase price, or more of the purchase price deferred to the future. 

 #6 Don’t Wait too Long to Assemble Your Deal Team 

Trying to transition a business without key advisors can lead to failed transactions, unwelcome surprises on the tax or legal front, and will consume your time as a business owner, taking attention away from your company. Your team should include a CPA with specific business transition experience, an attorney with business transition experience, a patent attorney if intellectual property is a key part of the transition, a financial planner and an M&A/business transition advisor. The team should be committed to working together to anticipate challenges and develop strategies to mitigate them, and ultimately, work toward a successful outcome for you. 

 #7 Don’t Delay Tax Planning for the Transition 

Many business owners spend a significant amount of time trying to minimize taxes from operations, but spend very little time on tax planning for a transition. Start planning well in advance, even 3 – 5 years ahead is not too early to begin exploring options. Include your deal team in these discussions. 

 #8 Don’t Defer Maintenance or Other Issues 

Leaving an environmental issue, a challenging key employee, or deferred equipment/ facility maintenance to the next owner, assuming they will accept this or not notice, is a problem waiting to happen. It can lead to a failed transition, future liability risk after a transaction, lower value and other headaches. 

 #9 Don’t Focus Only on Price 

It is easy to be focused on price. However, the real focus should be on net value to the owners after taxes, fees, escrows, earn outs or contingent payments, and risks in the purchase agreement. There are so many other items to focus on beyond just price to achieve a higher net value than purely price. The price discussion may be great for the ego, but you can only spend what you net. The deal team is an important resource in maximizing your net proceeds. 

#10 Don’t Start the Process Unless You are 100% Committed 

Owners will sometimes say things like “I just want to see what I can get for the business” or “Everything is for sale”, and make a half-hearted commitment to the process. This is a process, it take time and effort on the part of the owner, advisors, potential buyers and all involved. We estimate that to have a successful transition outcome for the average mid-sized closely-held business, it is at least 800 hours of work by the team of financial advisors, CPAs, attorneys, and M&A advisors. Buyers, their bankers, and their advisors want to work with someone committed to the process. Don’t start the process, unless you are truly ready and committed. 

Robert J. McCormack, CVA, M&AMI, MBA is Founder and Managing Partner at Murphy McCormack Capital Advisors. He can be reached at 570-524-7253 or [email protected]