Most accounting and tax practitioners will only ever sell once in their lifetime, maybe twice. So we don’t get a lot of practice runs. Rather the opposite – we go straight to the final. It is easy to make mistakes. Here are the top 10 mistakes when selling an accounting practice.
Top 10 Mistakes When Selling an Accounting Practice
This list is based on experience. No scientific survey or analysis of data. Just plain vanilla experience.
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Mistake # 1 Untidy Data
Untidy data really affects buyer’s confidence. Collate the data in the best possible way.
Not knowing your own numbers and not being able to present your business in a clear, concise and logical way is the number one Buyer Confidence Killer.
Put yourself in the shoes of a buyer about to buy a vehicle that has had a previous owner.
Imagine for a moment this vehicle will be transporting your family. Understanding its history, level of safety, longevity and future performance is critical in not only determining its value, but whether you will make a decision at all. The question is, “Does a car with a well documented logbook, increase the value of vehicle, and the likelihood of a sale?” from our experience, we have seen the difference, well presented data in a clear concise Information Memorandum can make to the value of a business.
Other benefits of a well presented Information Memorandum are the subtle messages they send to the buyer which are:
- That you are serious about the process
- That the other prospective buyers who will viewing the same document, will understand it and be in a position to take action
- That your ability, as a Vendor, to reach and qualify more buyers is greatly enhanced.
Badly prepared data can be a deal breaker because:
It erodes the value of your business
Well presented information reduces the buyer’s doubt and increases their comfort level. Tidy, relevant and concise data information, is presented of the business and this should translate into an easier and safe transition. Lack of information increases the buyer’s perceived risk, and higher risk should translate into lower price offers.
It greatly affects the buyer’s level of trust in you
Lack of information also increases the likelihood of the buyer believing the vendor is hiding something. This affects the level of TRUST which from our experience is vital for a deal to conclude successfully. Imagine trying to buy a care and the seller refuses to allow you to look under the hood. As a buyer, you would either stop right there, or offer a ridiculously low price.
It slows the process considerably increasing the risk of Deal Fatigue
Lack of Momentum kills deals. Our experience has shown the momentum is key factor in successful outcomes. we have found that long delays can often kill enthusiasm to complete the transaction and this can self perpetuate into a no deal at all.
Mistake # 2 Not Being Clear on the Ideal Outcome
If you just go in to see what happens, then you just go to where the wind is going. It is important to know what you want. Know what you are aiming for.
The 3 areas you need to understand are:
- How far down the track the acquirer is regarding the securing of finance for the transaction?
- What are the buyers alternate options should the financing not be approved?
- Should things not go to plan, what is the buyer’s capacity to pay any balance owing on the business?
Mistake # 3 Assuming that Buyers Got Finance
Never assume that buyers have their finances sorted. This is a common problem. Banks often don’t commit to anything in writing. Some banks want to see the contract before they consider anything else. A lot of contracts are subject to finance.
Most heads of agreement are subject to finance. However, if financing capacity has not been qualified correctly, the fate of the business sale lies in the hands of the bank or the financier. If the bank says no, and the buyer has no alternate funding options, it can mean wasted hours and significant expense. Prior knowledge about a buyer’s funding capacity is vital in the early stages of qualifying interested acquirers.
Mistake # 4 Not Being Fully Transparent
If the seller hides something and it comes out later, the buyers might lose confidence. The buyers will wonder what else they are hiding. The little white lie in the very first meeting might destroy the whole deal.
A few years ago, we worked as an intermediary on a deal, which for strategic reason, was perfect, for both the buyer and seller. It offered both a unique and lucrative upside. It means a significant upside for the buyer due to a resource that would allow the buyer to make the rest of its business considerably more profitable. For the seller, it meant achieving a significantly higher than expected price outcome. After 6 months of negotiating and after a complex contract had been written up and agreed upon, I received a call from the buyer.
Exchange was scheduled for the following morning however, the buyer was pulling out!…Why?…
It came down to a white lie the seller told the buyer in the early stages of their meetings. It was hardly significant but it bothered the buyer enough to cause concern. The buyer had a niggling feeling that if the seller was dishonest about a small thing like that, then ‘What else could they be hiding?”. It seemed insignificant at the time to the buyer, but it obviously had a far greater impact than the buyer or seller could have anticipated.
Mistake # 5 Expecting Plain Sailing
Very rarely a sale is smooth sailing all the way. The ride often gets bumpy. So expect a few potholes along the way. It is an emotional journey.
Often vendors do not anticipate the level of emotion that can exist in the sales process. Many anticipate a smooth ride, which is nice when it happens; however, all too often the negotiation and subsequent transition can be a highly stressful and emotionally taxing experience. Getting cold feet from the sellers due to confusion and stress is a common deal killer.
We recommend that vendors ask themselves the following questions:
- Am I committed to go all they way?
- When it comes down to the crunch, will I be able to sign on the dotted line?
- Am I clear about the reasons I am doing this?
- Have I weighed up all other options before coming to this decision?
- Am I clear about the outcome I am seeking?
- Have I articulated my BATNA (Best alternative to a negotiated agreement) and am I clear on my aspiration outcome?
- Am I prepared for an emotional journey?
PRO TIP: Don’t expect it to be easy
Thinking it is going to be easy and getting frustrated when it’s not, is another mistake vendors make when selling their business. Sometimes it goes extremely well and its great when it does, however…
For most, selling a business is not something one would do regularly. Most likely, it is the first time they have been a seller. Selling a business, particularly one which has been built up from scratch, can be an emotional experience. When the sale goes smoothly, count yourself lucky but there are many milestones along the way to a concluded sale. Anticipating hiccups in the process will build your resilience as a seller.
Mistake # 6 Not Asking the Hard Questions
Never shy away from asking the hard questions early on. You will save time and money if you cut straight to the chase.
Deal with the hard questions first. As intermediaries, we encourage both parties to get any questions, doubts or concerns out early in the process, rather than to keep moving forward, knowing the issue will need to be dealt with at some stage. This may seems obvious however, all too often both buyer and seller keep moving forward without dealing a major issue.
Addressing the questions early:
- Lays the groundwork for a smoother sales process
- Saves all parties time and money should the issue prove to be what we call a “Show Stopper”
- Reduces the risk of friction between buyer and seller as their relationship develops during the process of sale
Mistake # 7 Not Casting a Wide Net
Don’t just deal with one buyer. Create FOMO = Fear of Missing Out. Create a healthy competitive spirit around the sale
The old saying, “If you want a better price, invite more people to the auction”, applies as much to business sales as it does to real estate. Are you satisfied you are covering the full market? If you are only dealing with one buyer, how do you know what other options or opportunities are available to you? Dealing with one party only weakens you negotiating position as a seller. To access the entire market you will need a third party who knows the market, can filter on your behalf and protect your anonymity.
Mistake # 8 Not Protecting Your Anonymity
You give out sensitive information. Handle it with care.
Marketing a business during the sale process is a little unusual. It requires a fine balance of making public certain information that describes why your business is attractive, whilst at the same time maintaining confidentiality. If you’re advertising your business for sale and showing it to prospects it can:
- Unsettle existing staff
- Reveal strategic information to competitors
- unsettle clients and associates
- Compromise your ability to continue leading the firm
A broker can front for you, screening prospects and keeping the identity of the business secret from all except filtered, qualified buyers who have signed nondisclosure agreements.
Mistake # 9 Winning the Battle and Losing the War
Don’t fight for things that are not important. Ego kills many deals.
With all the different factors and personalities involved, the need to take pragmatic, flexible view is sometimes necessary. This shows empathy for the situation and a collaborative approach is always welcome and well received. A negotiation is a give and take process. If you dig your heels in too early, you might just find you get left behind.
Mistake # 10 Just Whinging It
Don’t start selling without a strategy. You need a formal process. Don’t just whine it hoping “she’ll be right”.
Selling a business is a process. It is a series of stages each depending on the other. Each step has a goal and objective. Execute any of these steps badly and the entire sale can be put at risk. Execute each individual step well and the chances of achieving your desired outcome are greatly enhanced. Finally you’ll want to evalute each stage.
Avoid these top 10 mistakes when selling an accounting practice and you will get a much better outcome.
Disclaimer: Tax Talks does not provide financial or tax advice. This applies to these show notes as well as the actual podcast interview. All information on Tax Talks is provided for entertainment purposes only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 05 May 2020