The Great Escape: 4 Traps to Avoid When Selling Your Business
So, you’ve dressed up the “bride,” scrubbed the financial kitchen, and found a buyer who claims to have both the money and the vision to carry on your legacy. Congratulations. Now comes the hard part where you try to actually get across the finish line without losing your shirt or your sanity.
Statistics vary but the number of businesses where the deal actually closes are less than 40%. And there are a myriad of reasons why. Here are the top four pitfalls to watch out for:
Statistics vary but the number of businesses where the deal actually closes are less than 40%. And there are a myriad of reasons why. Here are the top four pitfalls to watch out for:
1. The “Earn-Out” Mirage
A buyer might offer you $30 million, but then whisper that only $16 million is paid at closing. The rest is an “earn-out” based on future performance. In theory, it’s a way for you to prove the business is great. In reality, it often means you’re working for your successor—who likely has a very different management style—while they inadvertently (or strategically) make it impossible for you to hit those targets. If the earn-out looks like a carrot on a stick, remember: sometimes the stick is longer than the carrot. Bottom line—avoid the earn-out approach if at all possible.
2. Re-trading the Deal
This is a classic move. After months of due diligence, just as you’re picking out the upholstery for your retirement yacht, the buyer suddenly discovers a “concerning trend” in your third-quarter margins. They use this as leverage to drop their price by 15%. This is called “re-trading the deal.” Without an independent advisor & competent counsel to call their bluff and hold the line, many owners cave out of sheer exhaustion as the sale process can be quite arduous. It happens more often than you might imagine. Many experts even say to expect a re-trade.
3. The Letter of Intent (LOI) Handcuffs
The LOI often includes an “exclusivity” or “no-shop” clause. This means you take your business off the market while the buyer pokes around your books. If you haven’t properly vetted the buyer’s ability to actually close, you’ve just given them a 90-day window to waste your time while your employees start wondering why there are strangers in suits measuring the lobby for new desks. An expert advisor helping you along with an experienced M&A attorney can help you navigate through this trap.
4. Forgetting the “Net” in “Net Proceeds”
Business owners too often fixate on the “top-line” sale price. But once you subtract capital gains taxes, depreciation recapture, legal fees, and that success fee for the broker, your $30 million exit might feel a lot more like $12.5 million. An independent advisor helps you focus on the only number that matters: what lands in your bank account after the smoke clears. It’s not what you gross, it’s what you NET.
Selling your business is a high-stakes game of poker where the other side does this for a living. Having an independent advisor advising you ensures you aren’t the only one at the table playing with your cards face up. At Navon, our Founder has walked in these very shoes having built and successfully sold his business. Experience matters when selling your business. Getting key advice is mission critical to a successful sale.
Selling your business is a high-stakes game of poker where the other side does this for a living. Having an independent advisor advising you ensures you aren’t the only one at the table playing with your cards face up. At Navon, our Founder has walked in these very shoes having built and successfully sold his business. Experience matters when selling your business. Getting key advice is mission critical to a successful sale.