Selling a business is a complex and often emotional journey, especially for entrepreneurs who have poured their heart and soul into their ventures. In this era, entrepreneurs are heralded as the champions of modern innovation, effortlessly navigating turbulent waters to create success.
Accustomed to the driver’s seat, these individuals rarely falter when making executive decisions for their enterprises. However, while they may excel in running their business, the process of selling it introduces unforeseen challenges, predominantly stemming from human nature. This post delves into nine of these human-centric traps, aiming to equip business owners with the insight they need to navigate a sale successfully.
1. The Dangers of “Unknown Unknowns” – the Halo Effect
Recognizing one’s own limitations is paramount in business, especially when selling. Coined by Donald Rumsfeld, “unknown unknowns” aptly describes the unforeseen pitfalls lying in ambush for entrepreneurs. A seasoned business owner’s innate confidence, while admirable, can sometimes be a double-edged sword.
The halo effect is one manifestation of this, where success in one domain, say business management, breeds an unfounded confidence in another, like business sale negotiations. Drawing parallels with the overconfident doctor-turned-pilot meeting an unfortunate fate, this overconfidence can prevent business owners from seeking much-needed counsel. The result: they jeopardize the sale’s success.
2. The Emotions of Selling a Business: The Undervalued Role of Human Emotions in Business Decisions
Often, entrepreneurs place a disproportionate emphasis on rationality, with their decisions primarily emanating from their head. While rationality is vital, the heart (emotions) and gut (instincts) play equally crucial roles in decision-making. As entrepreneurs approach the sale of their business, there’s a pressing need to harmonize the head, heart, and gut, ensuring a holistic decision-making process that factors in not just the quantitative, but also the emotional and instinctual aspects.
3. Personal Attachment in Business Deals
Many entrepreneurs view their businesses as being akin to their offspring, having nurtured them from inception to growth. While emotional attachment is natural, it can complicate a sale. Buyers, in their quest for the best deal, might emphasize your business’s shortcomings. It’s crucial for sellers to remember this is strictly business and avoid taking criticism personally. Fight hard to maintain objectivity; many business owners bring in a trusted advisor to help keep them on track.
4. Unrealistic Valuation Expectations: Bridging the Valuation Gap
Business owners often misjudge the financial implications of selling their enterprise. They are often unaware of the extent their personal expenses are intertwined with the company’s finances, risking future financial strain post-sale. There’s also a common misconception among owners about their successors. They mistakenly believe that their children or employees wish to take over, leading to dashed hopes.
Overvaluing Intangible Assets, Sweat Equity, and Other Common Reasons for Valuation Gaps
Perhaps the biggest unrealistic expectation comes when valuing a business. A business owner must remain objective, align their expectations with market realities and keep in mind:
- Emotions and past sacrifices, though significant, don’t translate directly to economic value. The so-called “sweat equity” or unpaid labor doesn’t have a direct monetary value in a transaction.
- Comparisons with other businesses can be misleading, as every company has its unique value.
- The reality of inherent risks in their business, especially if its success is tied to specific individuals or clients. Buyers prioritize risk assessment, aiming for a balance between risk and reward.
- Overvaluing the company’s goodwill, which relates to intangible assets like brand value, can skew the perceived worth of a business.
5. Partner/Key Employee Dynamics and Buy-Sell Agreements
Partnerships in business can become as intricate as personal relationships. When selling a business, disagreements among partners, especially those with equal stakes, can be major obstacles. A proactive solution lies in buy-sell agreements. These contracts pre-determine how a partner’s share gets reassigned if they exit. Ensuring clear terms and open communication early on can mitigate future disputes during critical transitions.
While momentum is key in finalizing a business deal, rushing can be detrimental. Buyers might rush sellers, leading to overlooked details and mistakes. Patience is vital to ensure a fair and optimal sale. Though the sale process can be lengthy, often spanning nine to eighteen months, it’s crucial not to get ahead of oneself and anticipate outcomes prematurely. Always remember: not all potential deals will come to fruition.
7. Negotiations: Lack of an Arm’s-Length Mindset
To achieve the best outcome, it’s essential to maintain a firm stance in negotiations and be ready to walk away when necessary. An ‘arm’s-length mindset’ means approaching the sale of your business dispassionately. Without many state or federal protections for business sales, you’re essentially on your own. Experienced buyers can detect hesitation and will exploit any perceived weaknesses. Always remain vigilant and prioritize your interests.
8. Failure to Anticipate Post-Sale Emotions After Selling your Business
Even with a successful sale, disappointment may arise. Selling your business often signifies the end of certain relationships, potentially leading to the loss of employee and professional connections. The sale may only benefit a select few, leaving others disgruntled.
If you’re required to stay post-sale, prepare for a role shift from owner to employee. It can be challenging to watch the buyer implement changes, believing they can optimize your business better than you. Remember, once sold, it’s their business. The buyer’s decisions may differ from pre-deal promises, but adjustments are often part of adapting to new business situations.
9. Lack of Purpose
One of the most critical pitfalls for a seller is lacking a clear purpose. It’s like being on autopilot without understanding the reasons behind your actions. It’s vital to identify and understand your motivations, and stay in tune with “Your Why.”
The Human Element of Selling
Selling a business is as much an emotional endeavor as it is a financial one. The intricate web of human emotions, from unrealistic aspirations and partner disagreements to the sting of post-sale regrets, underscores the complexity of the process. It’s not just about valuations and contracts; it’s about understanding the profound impact of these transactions on human lives and relationships.
As sellers navigate the multifaceted journey of selling their business, acknowledging and managing these human elements can make the difference between a successful transition and one fraught with regret. Ultimately, the key to a smooth sale lies not just in numbers, but in recognizing and respecting the human element behind it.
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.