Selling a business is one of the most significant decisions a founder or family owner will make. It’s a complex journey, and while the potential rewards are substantial, so are the risks. Many business owners, despite their entrepreneurial acumen, stumble into common pitfalls that jeopardize a sale, reduce valuation, or lead to a frustrating experience.
At Walden M&A, we guide middle-market businesses through divestitures and acquisition searches, valuations, structuring, and negotiations. Walden Principal Bob Tankesley, and author of “Exit Teams,” draws on decades of experience to help clients avoid these common mistakes and achieve their desired exit. Tankesley shares some of the most frequent missteps and how to sidestep them.
Pitfall #1: Failing to Build Owner Independence
One of the biggest red flags for potential buyers is a business that is heavily reliant on its owner. This is often referred to as an “owner-centric” business. Buyers are not looking for another job; they are investing in an asset that can generate revenue and operate efficiently with minimal direct involvement from the seller post-acquisition. As Tankesley states, for companies where “we see owner centricity are going to be more difficult to sell”.
How to Avoid It: Start early in delegating responsibilities and building a strong, capable management team. Document key processes and procedures so the business can run smoothly even in your absence. The more optimized and independent your business is, the more attractive it becomes to a buyer, often leading to a higher valuation. This optimization process usually takes at least three years to prove to a buyer the changes are sustainable.
Pitfall #2: Disorganized or Inaccurate Financial Statements
Financial statements are the “first screening tool” for buyers. They tell a story about the business’s past performance and its potential future. Many business owners, particularly those of privately held companies, do not maintain their financials with a buyer’s scrutiny in mind. This can lead to questions, delays, and a diminished perception of value.
How to Avoid It: Engage with an experienced accountant or financial advisor well in advance of a sale. Ensure your financial statements are clean, consistent, and adhere to Generally Accepted Accounting Principles (GAAP). Address any discrepancies, normalize earnings by excluding personal expenses or non-recurring events, and ensure your financials align with your tax returns. This proactive approach builds credibility and instills confidence in prospective buyers.
Pitfall #3: Underestimating the Emotional Impact of Selling
Selling a business, especially one you have poured your life into for decades, is an intensely emotional experience. Owners often identify deeply with their companies, and the thought of letting go can be overwhelming. This emotional attachment can sometimes cloud judgment during negotiations or lead to reluctance to fully commit to the sale process. Tankesley notes, “I don’t know that you can completely emotionally prepare” for this transition, comparing it to a parent letting go of a child.
How to Avoid It: Acknowledge the emotional aspect of the sale early on. While you may not be able to fully “emotionally prepare,” understanding it is a process can help. Focus on the future and the new chapter an exit will bring. Surround yourself with an objective advisory team who can provide guidance and help you maintain perspective throughout the transaction.
Pitfall #4: Not Building a Comprehensive Advisory Team
Many owners attempt to navigate the sale process with limited professional guidance, relying solely on their own business acumen. However, M&A transactions involve intricate financial, legal, and strategic considerations necessitating specialized expertise. This lack of a well-rounded advisory team is a significant pitfall, often leading to missed opportunities, suboptimal terms, or even failed deals.
How to Avoid It: Assemble a “team of advisors“. This should include an M&A advisor, a legal counsel specializing in M&A, and an experienced accountant. These professionals work collaboratively to ensure all aspects of the deal are covered, from maximizing value and structuring the transaction to navigating due diligence and legal complexities. As Tankesley notes, in his experience, transactions “where they had an exit team tended to have a better outcome”.
Pitfall #5: Unrealistic Valuation Expectations
Every business owner believes their company is worth a premium, and rightly so, given the effort invested. However, an inflated or unrealistic valuation can deter potential buyers and prolong the sale process unnecessarily. Only 2% of owners truly understand their transferable value. Tankesley finds this statistic shocking, saying, “That would be like you or me, putting money in a retirement plan, building for the future, and never getting any statements for 40 years until 6 months out from retirement”.
How to Avoid It: Get an objective and professional valuation of your company early in the process. An M&A advisor can provide this, helping you understand what buyers are willing to pay based on current market conditions, industry benchmarks, and your company’s unique strengths and weaknesses. Be prepared to adjust your expectations based on market realities. The goal is to set a fair and attractive price that draws a strong pool of qualified buyers.
Pitfall #6: Going to Market Prematurely or Unprepared
Approximately 80% of companies are never taken to market, and only 20% of those are actually sold. This statistic highlights a common pitfall: going to market before the business is truly ready. This often happens when owners are eager to sell but have not taken the necessary steps to optimize their business, clean up financials, or build an independent operational structure. Tankesley observes many businesses “went to market prematurely” or “unoptimized”.
How to Avoid It: Take the time needed to prepare your business for sale, ideally a three-year window, to demonstrate consistent performance and operational improvements to buyers. Work with your M&A advisor to ensure your business is optimized and presents its best possible face to the market. Addressing potential buyer objections before they arise is key to a smooth and successful transaction.
Selling your business is a transformative event. By understanding and actively avoiding these common pitfalls, business owners can significantly increase their chances of a smooth process, a successful sale, and a maximized return on their life’s work.
Are you considering selling your business within the next few years? Fill out the form below to start a conversation with the Walden M&A team.