As an entrepreneur, you’ve invested countless hours, resources, and passion into building your business. But have you given the same level of attention to planning your exit? Many business owners make the critical mistake of neglecting exit planning, leading to suboptimal outcomes that can derail their financial security and tarnish their legacy. Below are a few commonly overlooked consequences of failing to plan for your exit.
Mistake #1 – Not Appreciating Valuation from a Buyer’s POV
Sellers often overestimate the value of their businesses due to emotional attachment or lack of market knowledge. Before going to market, it’s crucial to consult with an experienced M&A firm, who will normalize financials to reflect adjusted cash flow, provide data on comparable company sales, and offer guidance on probable deal terms. Buyers assess targets based on quantitative (financial) and qualitative (team, industry trends, etc.) factors. Don’t waste your time pursuing a sale unless you’re comfortable accepting probable market value and terms. Before Kinected accepts a client, we ensure that all three “legs of the stool” are well-supported: the business is performing well, the owner is financially prepared (can afford to sell), and the owner has a personal post-retirement plan.
Lesson: Get an Opinion of Value from an M&A professional before going to market.
Mistake #2 – Underestimating the Complexity of Exit Planning
One common pitfall is assuming that selling a business is as straightforward as negotiating commercial agreements with suppliers or customers. Exit planning is a complex process that requires specialized knowledge and experience from a few highly experienced resources. Just as your surgeon, pilot, or electrician would tell you — sometimes you need to trust professionals. Without proper planning, you risk leaving money on the table or, worse, throwing away a ton of time and money to ultimately not sell your business.
Lesson: Build your team of advisors 12-18 months before you intend to go to market.
Mistake #3 – Financial Repercussions for an Unprepared Seller
Rushing into a sale without adequate preparation often leads to catastrophic financial consequences. Deals frequently fall apart during due diligence as sellers are not prepared to have their books and records scrutinized. For example, we once discovered that our client has overstated earnings by $2M by paying commissions directly from retained earnings. If we hadn’t caught this prior to going to market, the seller would have faced two terrible outcomes – a busted process or the sellers being asked to accept a valuation 70% less than they expected.
Lesson: Engage a fractional CFO/CPA firm to ensure your financials are GAAP-compliant (Generally Accepted Accounting Principles) prior to going to market.
In today’s competitive M&A landscape, professional buyers seek businesses with solid financial performance and reporting, deep management teams and well-diversified customer and supplier bases. Buyers often pay a 20-30% premium in competitive processes for well-prepared companies exhibiting these characteristics.
Selling your business is likely one of the most significant financial events of your life. Properly preparing your business for sale and engaging the right team of advisors can maximize your business’s value and ensure a seamless transition to your next chapter.
Don’t let a lack of exit planning erode the value you’ve worked so hard to build. Start your exit planning now and engage with an experienced team to secure your financial future. Kinected Advisors has an 87% closing rate, significantly higher than the industry average of 20%-30%. Our ExitBoost™ service helps you prepare by providing a baseline valuation, a salability assessment, and on-going consulting to ensure your business is positioned to sell for maximum value when you and the business are ready.