For entrepreneurs looking to sell their small business, it is just as important to protect yourself from unnecessary risk as it is to determine the value of the business you’re hoping to sell. The most common reasons to sell a business, according to Business News Daily, are burnout, to avoid tax changes, to take advantage of a planned retirement or the desire to pursue new ideas. Whatever your reasons, there are some risks involved—here’s what they are and how you can avoid them.
Make sure you get a significant down payment from a buyer. Your buyer is less likely to walk away if he or she could lose a large chunk of change by doing so.
Additionally, the overall state of the economy can drive the price of a business up or down as markets fluctuate. For example, a third-quarter market study from the Market Pulse Survey Report in 2012 indicated more than half of those surveyed were expecting fewer sellers to be in the market. A shift such as that indicates the tidal wave is turning to a sellers’ market, making it a good time to sell a business. Other dangerous fiscal setbacks, such as an economic crisis, can play major roles in affecting the value of a business, and a seller should be aware buyers are more hesitant when the economy struggles.
Know Who’s Buying
A smart seller knows it’s important to thoroughly review the credentials, credit history, financial history and business accomplishments of a buyer before entering into negotiations. Business Book Press reports many business sales fall through because the buyers are not willing to invest the necessary work to operate a business. Or, they have good intentions but lack the courage to dive into ownership. Sometimes, buyers can be unaware of what it actually costs to run a small business and get in over their heads. Astute sellers do everything they can to get to know buyers before entering into a sale with them, lest the seller be burned.
Despite your best efforts, the information regarding a sale is disclosed before it is finalized. Perhaps it is work of a disgruntled employee, a phishing scheme or a simple slip of the tongue, but the news that the business is being sold can sweep through a company. It can create a wave of reactions in employees, suppliers and customers.
Employees’ first reaction to the news a business is being sold is often fear, especially about losing their jobs. In reality, most small business buyers have no intention of “cleaning house,” as a healthy, well-run business is usually the product of hard-working, skilled employees. While business owners who are selling may struggle with when the right time to announce a sale is, it’s often better to wait until a deal has been struck, rather than to reveal the information while still in the nebulous realm of “presale.”
In the end, selling a businesses is often as big a risk as starting one. Giving something you have worked hard to create to someone else to take over can be emotionally and fiscally terrifying, but those with the drive and desire to be their own boss know the goal was always to leave behind something you made with your own effort, investment and hard work. Creating a legacy of jobs for others is part of what being an entrepreneur is all about.