Classic Seller Blunders to Avoid
While every deal is different in its own way, sellers seem to make the same kind of blunders that can either make their business unsellable or tank a sale in progress. We offer these examples as a public service announcement to those who are serious about selling a business. To those who are buying a business, these are the sorts of situations solid due diligence (and a serious broker) will uncover.
Excessive Personal Expenses
A certain amount of personal expenses run through the business is something we are used to seeing. But in most cases, it might be season tickets to the symphony or some sports events. We generally like to see less than $10,000 of these types of expenses. Where we start to get into trouble is when we see $50k, $100k, $200k in personal expenses run through the business. That’s when we get into “company boats,” “company lakehouses,” “company home remodelings” and “company plastic surgery.” Obviously, there’s nothing “company” about those expenses: they were being run through the business to evade taxes. The morality of that is a topic for another time. What matters for business transactions is that banks won’t go near businesses that operate like that.
That doesn’t mean they would never go near such businesses. It’s just that all those expenses would have to be properly categorized and live outside the business for a number of years so that your business would look the way a bank wants it to look: clean.
Not Filing Taxes
What goes hand-in-hand with not running a lot of personal expenses through the business is making sure you are timely with taxes. We had a situation one time in which a bank was validating tax returns (as they always do before a deal closes) and we found out that the seller had never filed his taxes. He had filled them out and signed them…those were the copies he had given to us. It turns out he was then just putting those in a file in his desk somewhere. He managed to rectify things with the IRS before the deal closed precisely because there wasn’t going to be a deal to close if things were not buttoned up with the IRS. We don’t know what it ended up costing him to “save” in this way but it’s not likely to be a technique he’ll repeat in a future business.
Commingling Businesses
Some entrepreneurs have multiple businesses that run in related ways to each other. And that’s great. What’s not great is when funds get commingled and improperly reported, which makes it very difficult to see which business has which kind of margin so as to help determine a proper valuation. A best practice in life and in business is to keep separate things separate. It’ll be less confusing to everyone and, as noted above, makes a deal more likely to be bank-financed.
Cash Hoarding
Believe it or not, some sellers stop paying their bills, including their rent, in the final 30-60 days of owning the business, thinking that they can just stick the tab onto the buyer. These sorts of tricks almost always get noticed and can truly threaten the closing of a deal.
Failing to Consult a Lawyer
For some reason or another some first-time sellers, in a transaction that is likely going to net them 6-7 figures, will ask, “Do I really need a lawyer for this?” as they slide over something they printed on LegalZoom the night before.
Firstly, we have an Offer to Purchase, a signature service that is precisely geared towards covering you initially without hitting you too hard financially.
Secondly, is this really where you want to skimp? The legal paperwork covering one of the most significant financial transactions of your life?
Finally, consulting a lawyer will also help get the ball rolling, if it hasn’t been rolling already, on your financial planning regarding the tax events that will accrue as a result of the sale. This is not a part of business life that you want to DIY.
Do you want to avoid these blunders? We’re here to help. Give us a call today.
