Common Mistakes in the Sale of a Company and How to Avoid Them
The sale of a company is a pivotal step in the life of every entrepreneur and requires thorough preparation. Therefore, it is essential to devote maximum attention and adequate time to the process. However, even a meticulous approach may not suffice in certain cases if specific risks that need to be addressed are not identified. In this article, we will examine the most common mistakes that sellers make when selling their company, so you can avoid them.
The company is not adequately prepared for sale
Just as when selling a car, where we wash, polish, and possibly fix minor defects beforehand, the same principle applies to selling a company. It is necessary to organize it properly to enhance its attractiveness to potential buyers. For this purpose, we recommend utilizing what is known as Vendor’s Due Diligence, or a pre-sale audit of the company. You can learn more about Due Diligence here. Although proper Due Diligence is not yet widely practiced in the Czech business environment, it can uncover significant shortcomings that can be easily rectified, such as missing accounting records, unmet obligations, or other issues before the actual sale begins. This provides the seller with an opportunity to address these shortcomings or at least factor them into negotiations, thereby avoiding unpleasant surprises during the sale itself or subsequent dissatisfaction and accusations of concealing certain information by the buyer.
In addition to documentation and materials, it is also essential to prepare employees for the sale. Effective communication with key personnel will ensure that the company remains stable during the sales process, which would otherwise negatively impact its overall value. It is also important to consider their needs. For example, agreeing on a commitment from the buyer to retain key employees in their positions for a specified period after the sale and to guarantee them similar conditions to those they had previously. This will ensure that employees are satisfied, will not seek to leave the new owner of the company, and will not adversely affect the sale from their side.
Insufficient buyer due diligence
While the buyer is likely inundating you with questions about the state of your company, you should not overlook the importance of conducting your own due diligence on them. Find out who they are, what acquisitions they have made in the past, what they own, what their capital capabilities are, and what their objectives are after purchasing the company. This information can save you time and effort and help you determine whether you even want to negotiate with a particular interested party. Without thorough due diligence, you risk that the company, or its sensitive information, may end up in the wrong hands, even with a signed NDA.
Underestimating the importance of the NDA
A Non-Disclosure Agreement (NDA) is one of the most critical documents when selling a company. What is an NDA? The purpose of the NDA is to protect sensitive information about the company from misuse that could harm the company itself. Its absence poses a significant risk that sensitive data may fall into the wrong hands. We recommend signing an NDA even in cases where the parties are already familiar with each other.
Unrealistic time expectations
Many sellers do not recognize the time-consuming nature of selling a company. A medium-sized sale typically takes about six months, while larger transactions can extend up to a year, not accounting for the period of non-binding negotiations that precede the actual preparation process for the sale of the company. In the case of a large multinational corporation, internal approval processes within the corporation and public obligations set in a foreign country can further prolong the transaction process. Therefore, be patient and plan for a longer timeframe for the sale. An excessive push to expedite the transaction can not only discourage a promising buyer, but ultimately you may end up selling the company under terms that you did not intend to accept.
Unclear definition of post-sale obligations
Another common mistake is the unclear definition of the seller's obligations after the sale, particularly their subsequent role in the company post-sale. Whether they will be required to assist the new owner in "kickstarting" the business, for example, by establishing business relationships with customers and suppliers, aiding in the actual functioning and conditions within the company, and communicating with employees. The obligation to "stay" in the company under new management may entail adapting to new directions, a different job description, and a lack of time to devote to their new projects. Therefore, we advise clients to carefully consider whether it is worthwhile to remain in the company for a certain period after the sale or to have the option to allocate their time elsewhere.
In the case of a gradual sale of the company, it is important to clearly define the formula for calculating the purchase price of the remaining parts of the business shares that the buyer has not yet received. It is not advisable to tie this amount to the future earnings of the company, as the new owner may implement changes that could cause the company to incur losses, and you may end up selling the remainder of the company for practically nothing.
Not utilizing the services of a professional
The biggest mistake you can make when selling is not utilizing the services of a professional. Even though you know your company best, you lack the experience that professionals have gained through practice and assisting in numerous successful transactions. A legal advisor will ensure the correct contracts, a transaction advisor will establish effective processes, and a tax advisor will optimize the tax burden. Without professional assistance, you risk undervaluing the company, facing legal disputes, or incurring unnecessary tax expenses. Collaborating with professionals will ensure a smooth transaction process and maximize your return.
You can also read more about selling a company in our series I am selling a company, Part 1. and I am selling a company, Part 2.