As a business owner, planning your exit strategy is as crucial as setting up the business itself.
One of the most common forms of exits is a sale to trade or private equity, and they can be a very effective way to reap the rewards of your business on exit.
However, many business owners don’t know about the costs of selling a business until they are far along in the process – leading to confusion, errors, and delays that could reduce the value of the deal.
Here are the hidden costs of selling a business and how you can mitigate against them to ensure a smooth, efficient sale of your business for the best possible value.
Time and resource costs
Due diligence is a key process that business owners have to go through when planning to exit their business through a sale.
This is because a complete understanding of your company’s management, operational efficiency, and financial performance is essential for a third party buying in to the business.
However, due diligence demands time, attention, and detail.
Key staff – especially in finance, legal, and operations – can be pulled into the process for weeks or months.
This can result in slower day-to-day operations, delayed projects, and staff burnout.
To prevent due diligence taking up all your time and resources, appoint a dedicated internal lead or external project manager to coordinate responses and keep your team focused.
Make sure your due diligence is thorough and complete, and don’t be tempted to fudge the numbers! The buyer will uncover the truth, and they won’t be happy about it.
Unexpected advisor fees
Sellers often underestimate the cost of professional services.
You will need to instruct accountants to prepare financial packs, lawyers to review contracts and disclosures, and tax advisors to address complex tax queries.
Seeking clear estimates of expected costs from your advisors early on will help you plan ahead.
Make sure you build in a buffer to pay for any additional support you may need.
Tax exposure revealed late
Due diligence often uncovers tax issues, such as unpaid VAT, incorrect payroll filings, or aggressive R&D claims.
These can lead to the buyer demanding indemnities, delays in closing the deal, even a reduction in the sale price.
Conducting a pre-sale tax review will enable you to identify tax issues and resolve them before the buyer enters the picture.
Complications from share schemes
Poorly documented or misunderstood share incentive schemes (such as EMI or Growth Shares) can raise red flags.
This could damage the buyer’s confidence in your business and lead to delays in closing the deal, as well as require legal clean-up costs.
To avoid complications and buyer suspicions, ensure all share schemes are clearly documented, valued, and communicated to participants.
Reputational risks during buyer research
When conducting their due diligence on your business, the buyer may speak to customers, suppliers, or former employees to uncover information.
If your financials don’t align with what others say about your business, it can damage trust, delay the deal, and even result in the buyer walking away.
That’s why it is vital to make sure your financial story is consistent with your operational reality.
When preparing to sell your business, seek feedback from your employees and customers in advance of the buyer’s involvement. This will enable you to identify and address any inconsistencies that may arise.
Disorganised data room
A messy or incomplete data room can frustrate buyers and slow down the sale process.
It also signals poor internal controls, which could dampen buyer confidence.
Building your data room early can help to avoid these issues. Use a checklist and keep it updated throughout the process to ensure nothing gets missed.
Final thoughts
Selling a business is a huge achievement – but it’s also a demanding process.
By understanding and preparing for the hidden costs of a sale, you can protect your valuation, reduce stress, and keep your deal on track.
At Brown Butler, we work with business owners to prepare for a sale transaction well before the process begins.
If you’re thinking about selling, let’s talk early – because preparation is the best investment you can make.
For further guidance on selling your business, contact our expert advisors today.
