A lot has been written on tips and things to do before selling your business. By myself and multiple other M&A professionals. Clean up your books, scribble down your SOPs, find the right broker and so forth.
That’s all great and useful, but what about all the things you should avoid doing before selling your business? There are plenty of those things, and some are incredibly common and have the power to absolutely destroy an otherwise healthy transaction.
“It’s Not the Right Time”
As a broker, I say these words several times a week. Some other brokers are less inclined to use this phrase and would rather tell you whatever you need to hear to make you sell today – regardless of whether it means you’ll take a huge hit or not, but that’s not the point.
The point of this is that a lot of times it’s because of a few avoidable mistakes that I end up having to recommend my clients to hold on to their business for another year or sometimes longer.
So here’s my list of the most common “Don’t” ‘s, derived from my 11 or so years of experience in brokering online businesses and hundreds if not thousands of phone calls with sellers.
Don’t Get Involved in Marketing Experiments
A conversation that I find myself having far too often for my liking goes something like this:
Me: I can see a $40,000 expense in the “Advertising & Marketing” line from earlier this year, but it seems to have been on the P&L only temporarily. What’s that all about?
Seller: Oh, that’s just a PPC experiment that we did. It didn’t end up working out so we stopped it. We can consider those expenses an add-back, right?
Me: Did your ad experiment result in any sales at all?
Seller: Well, yeah, there were a few.
So what’s the problem here?
Simply put – while add-backs are a GREAT instrument we have at our disposal, often allowing us to “correct the mistakes”, so to speak, without having to reduce the valuation, the above scenario almost never qualifies as an add-back.
This means that regardless of the fact that the $40k experiment was a flop, this $40k was a legitimate expense and will remain on the P&L statement. In reality, it’ll likely mean taking a hit of around $80-120k after you apply the valuation multiple. Not exactly chump change.
The only two exceptions here are if the ad campaign didn’t do anything at all and if you can prove it, or if you can track any sales that resulted from the campaign with a 100% accuracy (but that’s almost never the case).
This way, the expense could be added back as it’s proven that it wasn’t responsible for any sales, or if it was and can be connected to the sales, the sales can be taken off as well.
Don’t Launch New Products
Look, if you’re selling iPhone covers then I’m not telling you to stop launching new products when the new model of the phone comes out. Similarly, if you’ve been launching 10 new SKUs a year for the last three years then, by all means, keep on doing the same. (In fact, doing anything different would potentially be an issue).
But if you haven’t done any major product launches for years then launching a new product or two 6 months before selling the business is definitely not something to consider.
Your best-case scenario is that it goes well and you won’t get paid for the additional revenue as not enough time has passed. But worse than that, if your product launch is a flop, you’ll likely lose twice on it, as you’ll be footing the launch costs, as well as taking a hit in terms of your business valuation, as the buyer may still want to take these expenses into account in their adjusted EBITDA calculation.
Don’t Make Operational Changes
By operational changes, I mean anything from hiring new people to switching to a brand new vendor to reducing your standard inventory levels – you name it.
There are, obviously, exceptions. If you’re currently working 80 hours a week on the business then you should absolutely hire help and do it right now, as few sane buyers would otherwise look twice towards your business.
Similarly, if you find out that your 3PL is massively overcharging you and you have the opportunity to switch to a cheaper one, go right ahead. As long as you have enough time to build a little bit of history, it’s even likely you’ll be able to work with your broker to add back the cost difference retroactively.
But in most other scenarios, making any important changes to your business within 12 months leading to the sale is a bad idea.
Buyers appreciate stability over most of everything else, and any changes, good or bad, affect stability in a negative way.
This is why boring business with boring operations and nothing exciting happening for years are often the kind of businesses that sells the quickest and at the highest multiples. Add to the mix a super boring product that no-one wants to replicate and you’ve hit the jackpot 🙂
Don’t Stop Running the Business
Perhaps the worst thing of all is stopping properly running the business because “you’ll sell it soon anyway”.
I mentioned before that continuity and stability are the things that most buyers are looking for. Because of this, businesses where the seller has stopped paying attention or worse, canceled or reduced ads or sold off stock, instantly become far less attractive and less valuable than the rest.
I understand probably better than anyone that “life happens” and at times, you simply don’t have the mental capacity to continue paying as much attention to each of your projects as you perhaps should. That’s the reality of things and it’s often why we make the decision to sell in the first place.
But even then, you should take a serious look at your priorities and do whatever you can to ensure this stability prior to selling, even if it means really pushing yourself, as not doing it is guaranteed to have a large, negative and near-immediate impact to the value of the business.
In conclusion, just remember to avoid doing anything that’s “abnormal” in any way, don’t be reckless with decisions that show up on your P&L statement and you’ll be in the clear.
And keep in mind that if you do happen to go against some of the above advice, it’s not the end of the world. Most things, when in isolation, can be “explained away” and sorted out. It’s when there’s a combination of several when things turn problematic.
He's co-founded several influential firms in the online M&A space and continues to play an active role in the industry as a broker, consultant and thought leader.
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