Selling your business can be a rewarding and profitable decision, but it also comes with many challenges and risks. Whether you are planning to retire, pursue a new venture, or simply cash out, you need to be aware of the common pitfalls involved with selling your business and how to avoid them. Here are some of the most important ones to consider.
Six Common Business Sale Pitfalls
1. Not preparing your business for sale
Famous basketball coach John Wooden said it best: “Failure to prepare is preparing to fail.” So it is with business sales, too.
Before you put your business on the market, you need to make sure it is in the best possible shape to attract buyers and maximise its value. This means having clear and accurate financial records, resolving any legal issues, streamlining your operations, and enhancing your brand reputation.
You may also want to hire a professional consultant to help you determine the fair market value of your business and advise you on the best-selling strategy.
2. Not finding the right buyer
In essence, not all buyers are created equal. Some may have ulterior motives, such as acquiring your customer base, intellectual property, or market share, and then shutting down your business. Others may not have the financial resources, experience, or vision to run your business successfully.
You need to do your due diligence on potential buyers and make sure they are qualified, trustworthy, and aligned with your goals. You may also want to consider offering seller financing or earn-out agreements to incentivise buyers and reduce the risk of default.
3. Inability to negotiate the best deal
Selling your business is not just about the price. You also need to consider the terms and conditions of the sale, such as the closing date, contingencies, warranties, indemnities, and post-sale involvement.
These factors can have a significant impact on your net proceeds, tax liability, and future obligations. You need to negotiate the best deal possible for yourself and your business, while also being realistic and flexible. You may also want to consult with a lawyer and an accountant to help you review and finalise the contract.
4. Not planning for the transition
Once you have agreed on the deal, you need to plan for a smooth and successful transition of ownership and management. This means communicating effectively with your employees, customers, suppliers, and other stakeholders about the sale and how it will affect them.
You also need to provide adequate training and support to the new owner and ensure that they have access to all the information and resources they need to run the business. You may also want to stay involved in the business for a certain period as a consultant or advisor to help with any issues or challenges that may arise.
5. Any myriad of taxation oversights
Selling your business can be a rewarding and profitable decision, but it also comes with some tax implications that you should be aware of. Here are some common tax pitfalls that you might encounter when you sell your business:
Capital gains tax
If you sell your business for more than its adjusted basis, you will have to pay capital gains tax on the difference. The adjusted basis is the original cost of the business plus any improvements or additions, minus any depreciation or amortisation. The capital gains tax rate depends on your income level and how long you owned the business.
Depreciation recapture
If you claim depreciation or amortisation deductions on your business assets, you will have to recapture some of those deductions when you sell the business. This means that you will have to report part of the sale price as ordinary income, rather than capital gain, and pay tax at your regular income tax rate.
Instalment sale
If you sell your business in instalments, you will have to pay tax on each instalment as you receive it. This can help you spread out your tax liability over time. You will also have to report any interest income that you receive from the buyer.
Asset sale vs. stock sale
If you sell your business as a whole, you can choose to sell either the assets or the stock of the business. An asset sale means that you sell each asset individually and pay tax on each asset according to its type and basis. A stock sale means that you sell the entire ownership interest in the business and pay tax on the total sale price as a capital gain. Each option has its pros and cons, depending on your situation and goals.
6. Not preparing for life after the sale
Physically and emotionally, life post-sale is certain to be very different. Far too often, people struggle to cope with it as they struggle to find a new challenge.
To begin with, selling your business can be an emotional and stressful process that can affect your personal and professional life. You need to prepare yourself mentally and emotionally for the change and have a clear plan for what you want to do next.
Moreover, you may also want to seek professional help or join a support group to cope with any feelings of loss, regret, or uncertainty that you may experience. You also need to manage your finances wisely and plan for your retirement or future investments.
Summary of Business Sale Pitfalls
Selling your business can be one of the most important decisions you will ever make. By avoiding these common pitfalls, you can increase your chances of achieving a successful and satisfying outcome.