SELLING A BUSINESS

Feb 23, 2022

Common Mistakes People Make When Selling a Business Online

Your business may not be Amazon or the next social media giant, but chances are it’s worth more than you may think. Business owners looking to offload their investment may believe it’s as easy as posting a sign out front and, although that may work for some, the majority of owners selling their company make a number of mistakes before a sale. 

Working with a reputable broker who specializes in business sales establishes a strong position, but so does avoiding certain mistakes commonly encountered when selling a business online.

Not Implementing the Right Exit Strategy 

Not all business transactions are one-and-done. Small business owners especially need to consider the impact that selling the business not only has on themselves but on the business as well. Although some corporations will purchase competition strictly to prevent it from being in the marketplace, the general idea is that the new owner who is purchasing the company is expecting net profits long after the ink is dry. 

Having an exit strategy is exactly what it sounds like—having a strategy to exit the business. Some ways to exit the business are:

• Gift the business to a new CEO or heir 

• Merge with a complimentary business

• Sell your stake in the company 

• Bring the company public 

• Sell to a prospective buyer

Once you have determined how you are going to exit the business, consider the impact it will have on operations. If the company is large and managers are well-trained, there may be no ripples in the pond. However, if it is a small company, or even a company with only one employee such as a dropshipping site or smaller apps, your exit will have an enormous effect on operations. 

For this reason, many business owners will enter into a mentorship role after the sale. They will remain available to answer any questions and help solve problems in a capacity not unlike a consultant, until a set date where they formally step away from the company. Having a clearly defined exit strategy will help avoid potentially disastrous situations. 

Incorrectly Determining a Valuation

Business valuations can be notoriously difficult to navigate, especially for a startup. As an owner, you are accustomed to the day-to-day financial aspects of running a business. It is common for business owners to not know how to correctly value their business. There are two parties to appease when determining a sale price: those who are invested in the company and, perhaps even more importantly, potential buyers. 

Too many small businesses incorrectly assign a valuation to their companies

Online businesses are notoriously hard to value. A Shopify store that sells a single product will be easier to value than a large company handling the cloud computing needs of a Fortune 500 company. Smaller online business owners may overvalue their company, expecting to do well in what is normally considered a seller's market. Savvy buyers are aware of this: and overvalued companies are unlikely to generate any buyer demand. You'll have better luck if you accidentally undervalue your company: savvy buyers will see the opportunity, and might even start a bidding war that gets you back to a market rate purchase price.

Businesses, even those that are appropriately valued, generally do not sell at their asking price. This is normal and can actually be a good sign. If you list an item, even a business, for sale at a price far lower than what it’s worth, you can be sure an opportunistic business buyer is waiting in the wings. To avoid being taken advantage of, online brokers specialize in determining what is a fair value for your company.

Selling at The Wrong Time 

Often, an entrepreneur who decides to sell a business they have built will do so out of a need for capital for personal use, or they are approaching retirement age, or they have some other health-related life event. This can lead to them selling before the business is truly ready to be sold. A liquidity event such as a sale typically occurs when an entrepreneur requires the money from the sale for a new business, to bolster their cash reserves or for some, they are simply too busy to manage the business. 

Knowing when to sell a business can be an art in itself. The price is determined not only by the business’ profit margins, but can be subject to the whims of the market as well. However, there are some clear signs that you may be selling your business at the wrong time:

• There are no available buyers 

• You believe the business has room for short-term growth 

• It occurs before a period of profitability that would generate increased buyer interest

• The business has a new product or service ready to be rolled out 

Working with your accountant and a tax professional can bring some clarity to sales timing. If you have shared equity in the business, a simple vote amongst shareholders could settle the issue. For others, especially small business owners, determining when to sell can be one of the most difficult decisions to make. The good news is there are indicators it may be time to consider listing the business for sale:

• Profitability has stagnated

• There is no room for future growth

• Business trends are changing and the business model no longer makes sense

• A prospective buyer is offering an above-market price 

• Your shareholders agree it is time to sell 

• You have lost interest in the business

As you can see above, there are many reasons to sell a business. There are other reasons that aren’t listed, such as personal reasons: only you can know when it is time to sell.

Refusing to Sell Through a Business Broker 

The reality of selling a business through a broker is that any broker worth using will take a healthy commission. It can be difficult to forfeit a sales percentage in order to secure a sale, but the benefits of working with someone who knows the industry, especially when you want to sell online, far outweigh the cost. 

Business brokers connect sellers with the right buyers

If it helps, think of an online broker like a realtor or an investment bank—they may seem superfluous, but statistics show sales professionals not only ensure a faster “close,” but at a price that oftentimes negates their percentage entirely.

Business owners have the tendency to obsess, especially when a deal is looming and they are about to profit from their hard work. The owner focuses entirely on the deal, and negates their business. This happens all too often when an owner is going through the sales process. Sometimes, the buyer backs out after months of negotiations. At that point, the owner would need to look for a new buyer, with a balance sheet damaged by their focus on the deal, and not the business itself.

Shopping through a few business brokers who sell businesses through an online marketplace shows businesses that sell quickly—and at a premium—do so because the business’ functionality and profits are not encumbered by a pending deal. In fact, posting increased profits may even bring you extra room at the negotiating table. 

The Bottom Line 

Although a business plan rarely accounts for selling the business, avoiding some of the more treacherous mistakes can save you a fortune. Performing due diligence on buyers and brokers is standard practice, but few owners have the maturity to turn that theory on themselves. Being honest with your approach to how you are selling a business will help make sure there is nothing in the way of a profitable sale.

Mitchell Grant

Content Writer

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.