If you’re a small business owner, you likely have a large amount of personal wealth tied to your business. You may have put hours of blood, sweat, and tears (and money) into building your company from the ground up. After years of hard work, retirement is right around the corner—until you find out your business is impossible to sell.
This is a worst-case scenario for any business owner, but it’s especially gut-wrenching to someone whose entire net worth is tied to their company. Don’t let this happen to you. Here are 6 fatal flaws to avoid when trying to sell your small business.
1. Poor Internal Communication
During the due diligence process, a seller will evaluate your business to make sure it’s a good purchase. Internal communication is one of the most important areas that a seller will assess, and there are various “tells” that could serve as warning signs about your business. If the office is uncomfortably silent, if employees seem to avoid eye contact, or if the atmosphere seems unwelcoming or unfriendly, there’s likely a reason.
If the owner of a business has taken steps to prevent people from communicating with each other, or given explicit instructions not to talk to certain individuals, something is very wrong with the business.
This is often a bigger red flag for small businesses, which usually have fewer employees and a tighter-knit staff. If your employees don’t seem to get along or seem fearful of the leadership, this could lead to difficulties when trying to sell.
2. High Turnover in Key Positions
Another symptom of an unhealthy organization is the inability to keep a person in an important role. If the office manager recently resigned, and the previous office manager was only with the company for six months, there is a strong possibility that they left due to a lack of support or a fundamental inability to make an impact. Part of the solution begins with defining the performance criteria and process flows of each position—regardless of who fills the role.
Most importantly, every critical role should have its own succession plan within the organization. This is particularly important for an incoming owner to see, as they are more likely to purchase a company that already runs smoothly on its own rather than one that needs a complete overhaul.
3. Weak Leadership
Weak leadership within the company is one of the most common pitfalls we see with small business owners. It often piggybacks off of poor communication and high turnover and it’s a key component in the marketability of your business. It’s one thing to be fully invested as the owner of the company, but are you inspiring your leadership team to do the same?
Does your company have a clear guiding strategy? Is it crystal clear who’s in charge at all times? When conditions change, such as the COVID-19 pandemic, does your leadership respond with a swift and well-thought-out plan—or do they fly by the seat of their pants and react emotionally to external conditions? A business needs to develop its leadership in order to grow to the point where it’s marketable for sale.
4. Sloppy Bookkeeping
It’s not uncommon for bookkeeping to fall by the wayside while small business owners manage the day-to-day operations of the company. Some bookkeeping issues won’t come to the surface until someone takes a closer look. Unfortunately, we’ve seen many business owners who haven’t taken the time to truly understand the financial aspects of their business, rarely looking at their financial statements or diving into the numbers. This is a huge red flag that should be avoided at all costs.
Sometimes issues come to the surface during due diligence, such as large unexplained balances on accounts receivable, inflated inventory, unpaid sales tax, net profit incorrectly reported, or other issues the owner was unaware of for multiple years. Accurate books are only part of the picture; a business owner needs to regularly review the financial statements and understand every number.
5. Lack of Operational Data
Operational data and clear-cut processes are important aspects of scaling a business. Without them, the owner of the company is stuck doing everything or spending hours training someone else. In order to sell your business, it should operate like a well-oiled machine with detailed instructions that anyone can follow. Operational data should explain things like:
- How does your company make decisions?
- When a new challenge arises, or when conflict pops up, what data does the management team rely upon in order to diagnose the underlying issue and determine an appropriate response?
- What data does your company use to evaluate the performance of each team member?
Companies that don’t use a data-driven approach will make decisions based on opinions rather than objective management processes. The goal of your operational data should be to make your day-to-day processes easily replicated and scalable.
6. No Clear Competitive Advantage or Brand Strategy
A brand is a crucial element of business longevity, and your brand’s values should be reinforced by a clear competitive advantage in the marketplace. Brand loyalty is what keeps customers coming back to your business and it can be one of your most valuable assets if you know how to build it.
It starts by understanding your business’s unique capabilities and then creating a story about your company’s values that endure beyond the current team. Scaling a business requires investing the time and energy to develop proprietary processes and intellectual property. Many small business owners never take the necessary steps to develop a true brand, often because they are too busy with the minutiae of keeping the business afloat. Building a long-lasting brand, however, is one of the best ways to improve the marketability of your business.
We’re Here to Help
Are you a small business owner planning to sell or are you considering different exit strategy options? At PeterAlexander, we have over 40 years of experience helping small business owners plan for the future with tailored financial solutions. If you would like to discuss how our firm can help you prepare for retirement and set up the foundation of your business to support your goals, reach out to us at 610.940.1441 or info@peteralexanderinc.com.
About Rick
Rick Hellberg is president and CEO of PeterAlexander, a financial planning firm founded in 1991. Rick is passionate about providing quality, objective financial solutions so his clients can pursue their financial goals and create the legacy they desire. He strives to equip his clients with comprehensive financial services and advice so they can be empowered to make sound financial decisions. The plans Rick and his team develop help their clients to reduce their taxes, educate their children, fund their retirements, pass their businesses on at fair value, and create programs to attract and retain valuable employees, all so that they can focus on what matters most to them. Rick has a Bachelor’s degree in Liberal Arts from Penn State, along with the Chartered Financial Consultant® (ChFC®) and Chartered Life Underwriter® (CLU®) certifications. He has spent over 40 years working with successful individuals and designs tailored solutions to meet his clients’ unique needs.
Rick resides in Philadelphia with his lovely wife, Lisa, and their two Shiloh Shepherds, Bentley and Winston. He is also the very proud father of two wonderful young men, Peter and Alex. In 2010, Rick ran for Congress in the 2nd District of Pennsylvania and has stayed active in local politics. To learn more about Rick, connect with him on LinkedIn.