Selling Your Business: How to Avoid the Missteps

To achieve a successful outcome, the sale of a private company needs to be carefully choreographed. We look at the key steps that business owners and entrepreneurs should consider.

Selling a private company is an exciting venture, a testament to the sweat and hard work you've put into building your business. But founders and entrepreneurs often make mistakes when undertaking this process for the first time. Many can be avoided with forethought and planning.

As a wealth manager, we’ve stood by the side of many business owners and entrepreneurs as they have been through the exit process. While we do not formally advise on selling a business, we have seen how to get the best out of the process – and maximise the rewards for your perseverance over the years. In our experience, selling a private company is not unlike an intricate dance. It requires preparation, deft footwork, teamwork and tactical improvisations.

Common Pitfalls

The first hurdle business owners face is often a lack of preparedness. Imagine selling your home. Before you invite a prospective buyer, you would probably conduct a deep clean, fix minor issues and make sure every corner is at its best. Now translate this to selling your business. Get your paperwork in order, ensure your finances are audited, complete any contractual or shareholder obligations and assess the market. Pay particular attention to reviewing any Enterprise Management Incentives (EMI) schemes, as these can frequently present issues later down the line. Consider organising a data room for due diligence. This phase is all about packaging your company attractively and transparently to fetch the best price.

The second pitfall often comes as founders try to coordinate navigating a sale process while also running the business. Often, founders lose focus on the day-to-day and the company’s performance can suffer. If you have a co-founder, consider splitting responsibilities so that one of you manages the sale process and the other focuses on ensuring the business continues to run smoothly.

Choosing the right team to represent you during the sale is another difficult area. Selling a business isn't a task to be undertaken without an experienced guide. In our view, trying to manage a sale process on your own is like trying to direct traffic without being a trained officer – you might have seen it done, but without the right knowledge and experience, things are likely to go off track and could result in a car crash. Your legal, financial and business advisers should all have a track record in managing company sales similar to yours. They should anticipate and disarm challenges before they escalate into major issues.

Negotiating deals often trips up the uninitiated. It’s vital to understand each clause in a contract thoroughly and seek guidance on opaque terms. "Earnout" conditions, where some payment is deferred and dependent on future performance, can be a red flag. While it reduces the risk for the buyer, if your company fails to meet these expectations, it could result in contentious disputes. While the earnout figures can inflate the headline deal value, be mindful of the fact that these are frequently not achieved as the founder and acquirer often part company before the term is completed.

Also, consider the tax implications in selling. You might have made a great deal on paper, only to find a significant bite taken from it due to unanticipated taxation. Engaging a tax adviser early in the process can be instrumental in minimising potential tax liabilities and maximising post-tax outcome.

Who’s the Buyer?

The valuation of your company is another common hurdle. Your company's worth isn't just column A of assets minus column B of liabilities on your balance sheet. It encompasses the intangible – your team's skill, your resilient company culture, the reputation of your brand. This holistic view is imperative as different buyers may place different values on these factors. Typically, a strategic acquirer who sees synergies may value your company higher than a private equity firm.

Overlaying this is the complexity of selling to a foreign buyer – be it from the US or Europe. Each region or country carries with it a set of business practices, a way of communication, a unique 'doing-business' culture. Ignoring this can impact the fluidity and success of the deal. We often forget business extends beyond numbers and finances – it's also about communication, understanding, and respecting different ways of working.

Similarly, if your business is in a highly regulated sector, there are additional considerations. Are you negotiating with a credible counterparty that will be acceptable to a regulator? To help with this, you should look for buyers that will likely be approved. Here, getting the right advice is important; a specialist corporate finance adviser who knows how the regulator behaves can be invaluable. Alternatively, if venture capital backed, a fintech/healthcare specialist VC will have relevant experience. Either way, cash runway is important as regulators can take their time granting approval.