Don't Let Your Money Away Unveiling the Top 5 Reasons Sellers Lose Money When Selling Their Business.mp3
Transcript
Hello and welcome to M&A murders and accusations. The good, the bad and the ugly of selling your business. We dig into what you need to know and how not to kill the sale of your business. Now here's our host Rick J Krebs, mergers and acquisitions advisor.
Hello everyone and welcome to our show today. This is Rick J. Krebs, M&A cowboy coming to you from Heber City, UT. And we're talking about the good, the bad and the ugly of selling a business. This topic has been on my mind for a while and I wanted to share it with you. It's a very important. These mistakes being made by sellers over and over again and they lose money. I mean, the bottom line is it costs them money, so the number one reason that I see or one of the five I'm going to say. Top five, I don't. Know if there's a number one or two, but I'm going to say the top five reasons that people lose money when they're looking at a sale. Is they have bad records and the problem is they think they're good records. I'm working on one right now and we're trying to figure out the working capital number or the amount of cash that needs to be left in the business. This one is complicated. That's a manufacturer. And they have work in process. They have deposits, customer deposits, there's deferred revenue. There's a lot of complex issues and they think that the financials that they're using are working because they have worked right. They've filed their tax returns. They haven't had audits or any issues, but from a selling standpoint, they work clumsily. Let's put it that way. They went along and so you won't really good financial records businesses typically. You know, if you're, if you're over a couple million in sales, it's probably time to hire a fractional. If, oh, probably time to hire someone to help you get the financials in order and to bring them from a tax reporting status to generally accepted accounting, principal status or gap status or accrual basis. And by doing so, you're going to really understand or better understand your financials. And in better understanding your financials, you're better able to negotiate certain aspects of the sale like working capital and cash on hand deferred revenue. And so I, and I've seen this, we had we had a construction company which we sold a few years back. And they didn't know what. Their receivables were. And anyway, we ended up just guessing on what they were. And our guess wasn't that good, but they ended up losing some money and leaving it on the table. I would say unnecessarily because of the financials. So you've got to have good financial records. That's number one. #2 going to market prematurely and I'm doing another podcast called when the businesses are in what's called the business. Puberty friend of mine Derrick Reeves coined the phrase and I love it. So these business owners come to me. In fact, I had 1/2 day came to me, you know, and they're still embraces and pimples and Proms. And they're not ready to go to market. You know, if you go up and try and get a day with the Dallas Cowboy cheerleader with pimples and braces and. And you're in puberty, you know, and to might patch you on the head, but you're going to have a very little likelihood of ever getting a date. And these businesses that are in business puberty are not ready to go. Market and if they do, then they will maybe sell, but they leave a lot of money on the table and doing so selling your business is the major leagues and you got to be prepared. So many business owners that in business puberty try and take it to the market and either fail clumsily or they end up selling for far less. Than they could you've got to start with the end in mind as Stephen Covey. He said. So I'm going to call it lack of preparation. You want to mind your exit. Don't blind your exit if you blind it, you bind it. Right. Business, puberty versus business maturity and you're going to want some outside help from someone who maybe has no financial interest in the sale to tell you if you're ready and tell you if you're in business. Maturity versus business puberty. #3 is tax planning. So oftentimes we're working as we're looking at a sale or looking to accept a letter of intent. We'll be working with the well meaning CPA and we ask them about the taxes and too many times I'm hearing you know what? Just pay the taxes. These are the taxes. This is what this is, what they. Are just paying. Them and that's. Not an acceptable answer to me, with some planning and with the right advisors, there are some tax ways to minimize. Taxes and tax strategies where we can get ahead of this versus behind it. So lack of tax planning. And preparation is another way I. See hundreds of thousands, if not millions, of dollars being unnecessarily paid to the government. And so you're going to want to make sure you have good advisors people to help you and multiple advisors. You know, we were talking about something. We're looking at opportunities zones yesterday. And uh, typically on an opportunity zone, you have six months after they're. Able to reinvest the property unless you're in a partnership or an escort. You get your K ones you know, sometimes up to up to 15 months after and so that can be extended and a lot of well meaning CPA's are telling the clients that it can't be extended, but. It can be. They just don't know and it's not their fault. But get a second opinion. And look closely at taxes and minimize them. Minimize the amount of taxes that you're going to pay. Don't just. Pay them. Number four, I would say unrealistic value expectations. If you don't know what the value or have a good idea of what the value of your business is, it doesn't make sense to take it to the market. It doesn't make sense to throw it out there and just, I say putting crap against the wall and hoping something's going to stick. So these unrealistic value expectations, what happens is you go out there at a high price and what it does is makes everyone else look better. You know the other, the other businesses similar to yours just look better and yours looks worse. You end up lengthening the process, costing you money, and it's going to sell for what it's going to sell for. In the end, it doesn't matter. You know if you've got a if you've got a Ferrari, it doesn't matter who owns it, it's worth what it's going to be worth when it's sold. And it's the same way with the business. So #4 is unrealistic value expectation. #5 is define what is included in the sale. You have to spend a lot of time and I know my hand on this but it's working capital. You got to figure out a reasonable amount of working capital, but if that's included, you put it in. If it's the excluded, you take it out. But defining early what? Is and what is not included will save you a lot in the end if there are some assets that you want to carve out to and we do carve outs, there's some sales that are carve outs, but. You've got to put your arms around and clearly define what is included and what is excluded in the. So those are the five main ways which I see business owners leaving money on the table, losing money and not selling for optimum value. This you've got one chance to get it. Right. Let's get it right. Let's take the. Time we need. They get it. Right. I was just talking to a guy this morning and he's in business. He's got a construction company in Florida. And you know what? He's just in business puberty he needs. To needs to have a little more time. He needs to get rid of the braces. He needs to do. Some work you know. Let those pimples, all and as the skin clear up, the pimples. Go away and let him mature. And I loved his question. He came back and he said, you know what, Rick? Yeah, I understand that. So instead of 2,000,000, how do I take this to 5 or 7,000,000? And I love that. Question because it means OK now he's open. He's saying OK, let me invest a few more years of my life into my baby into this thing. In my business and let's take it and sell it for, you know, three or four times what I was telling me was going to sell it for if you sold it today. So just ask yourself, do you have the energy, you know, for two or three more years and potentially millions of more dollars and have a much better exit in the end? So thanks again for your time today. It's Rick. You're M&A cowboy. Murders and accusations. The good, the bad and the ugly of selling a business and hope you have a great day. And thank you for tuning in.
Thank you for attending our podcast. We invite you to join us for future episodes of M&A, murders and accusations. The good, the bad. And the ugly of selling your business. You can also. Visit us at www.bsalesgroup.com or e-mail Rick directly at Rick@salesgroup.com.