In order to sell wisely, many of the same principles apply whether you’re fielding an unsolicited offer or proactively marketing your business for sale. It’s critical to have clear sales terms, ensure both parties perform due diligence, identify sources of financing, and have a clear transition plan, among other steps. It’s a complex process, and you don’t have to go it alone. A trusted business broker can help safeguard your interests and ensure your satisfaction during and after a sale.
As the owner of a small-to-medium business (SMB), you’ve invested time and money growing your company, so you want to protect your investment even as you prepare to exit. In this article (the third in our “Sell Wisely” series), we dive into the importance of an accurate business valuation, how risks to confidentiality can jeopardize your sale, and ways to mitigate that risk.
Understanding Your Company’s Worth
From the SMB owner’s standpoint, the most vital part of entering a sale is knowing your company’s value. Here are a few essentials about valuation, including its importance, pitfalls that may occur, and methods professionals use to calculate value.
The Importance of Accurate Valuation
When considering unsolicited offers or planning to market your business, knowing the true value is the foundation for empowered decision-making. Accurate valuation gives you the knowledge to negotiate wisely, ensuring you receive a fair price for your hard-earned assets. It also helps you assess the feasibility of unsolicited offers and prevent hasty decisions. Understanding your business’s true value allows for strategic planning, proper financial preparation, and the ability to gauge whether selling aligns with your long-term goals. It’s the key to achieving a successful and satisfying exit strategy, whether you decide to move forward with a sale or not.
Even though you know your business better than anyone, you might encounter some pitfalls in valuing your own company. Here are five common mistakes SMB owners make in valuation:
- Privileging emotional value: Emotional attachment to the business can lead to unrealistic price expectations.
- Focusing solely on revenue: Other financial metrics like profit margins, cash flow, and earnings before interest, taxes, depreciation, and amortization (EBITDA) are also important.
- Neglecting balance sheet items: Overlooking tangible and intangible assets, such as customer contracts or intellectual property, can lead to an undervaluation.
- Not seeking professional guidance: Valuation is a complex process that requires the expertise of business appraisers or financial advisors. Relying solely on one’s own judgment can result in an inaccurate valuation.
- Overvaluing future growth: Using overly optimistic growth projections may not be realistic.
These are some of the most critical mistakes that can impact the accuracy of your business’s valuation. Addressing these issues and seeking professional assistance can lead to a more precise and credible valuation.
Valuation Methods and Considerations
Business valuation methods can vary depending on the valuation’s purpose and the business’s specific circumstances. You can find more detail about standard business valuation methods in this blog post. In practice, a comprehensive valuation often involves using multiple methods to cross-validate the results and arrive at a reasonable estimate of the business’s value.
Obtaining a comprehensive business valuation is essential for making informed financial decisions. Working with professionals and maintaining transparency in your business operations is crucial to ensuring the valuation process is as accurate and fair as possible.
Engaging Experts for Valuation
Selling your business is one of the most pivotal decisions you’ll face as an SMB owner, which makes the professional assistance of a reputable business broker indispensable. Business valuation is a complex and nuanced process that requires expertise in financial analysis, market research, and industry-specific knowledge. A certified business appraiser or valuation expert brings objectivity and experience to the table, ensuring that all relevant factors are considered, from tangible assets to intangible factors, like intellectual property and customer relationships. Pros, like the team at Viking M&A, employ industry-standard methods and best practices, providing credibility and accuracy that a do-it-yourself approach can’t match.
Relying on a professional for business valuation can profoundly impact your financial future, offering confidence and peace of mind in a process often laden with complexity and uncertainty.
Protecting Your Business’s Confidentiality
Now that you’re more familiar with determining your company’s value, let’s talk about one of the main threats to a sale’s success: confidentiality breaches.
Identifying Confidentiality Risks
One of the foremost issues to navigate during a business sale is protecting confidentiality. Mishandling proprietary data related to employees, customers, or suppliers can jeopardize your sale and put your professional credibility and business at risk. Another risk is the exposure of confidential financial records to competitors or the broader market, potentially affecting your company’s negotiating position. The involvement of multiple parties, such as potential buyers and investors, increases the risk of leaks or unauthorized disclosures.
Safeguarding business confidentiality requires a well-structured approach, including non-disclosure agreements, strict information access controls, and careful communication management, to mitigate these risks and maintain the integrity of the sales process.
Here are some common types of confidentiality breaches and how they can impact your business sale:
Employee Leaks
When employees inadvertently share sensitive information with colleagues or on social media, it can compromise negotiations by making your team look untrustworthy. The damage to employee trust and morale can also make transitioning to new ownership more difficult for them and the firm taking the reins.
Data Theft
Data theft isn’t always the work of nefarious hackers. In some cases, employees may inadvertently access and/or release confidential information. However, the legal issues and reputational damage your company incurs can be significant either way, and any data breach can jeopardize a sale.
Disclosing to Other Buyers
When attempting to conduct a sale yourself, you may field multiple offers. With several conversations happening simultaneously, you might accidentally disclose one company’s details to another. These instances can negatively impact your credibility, bargaining power, or business’s perceived value.
Public Disclosure
During a sale, sensitive information may become public through media leaks or unauthorized press releases. Attempting to conduct a sale yourself increases the risks resulting from these leaks, including negative market perception, reduced business value, or loss of potential buyers.
Confidentiality breaches can have far-reaching consequences on your sale’s outcome. To ensure the safekeeping of critical information, consult a professional business broker before, during, and after the sale.
Mitigating Confidentiality Risks
Here are some practical steps you can take as a business owner to protect your confidential information:
- Require Non-Disclosure Agreements (NDAs): Require all parties involved in the sale, such as potential buyers, advisors, and employees, to sign NDAs to legally bind them to confidentiality.
- Classify and Prioritize Information: Identify and categorize sensitive data into levels of confidentiality. Limit access to only those who need it.
- Implement Access Controls: Add robust access controls to restrict data access based on individuals’ roles and responsibilities. Use passwords, encryption, and multi-factor authentication to secure data.
- Train Employees: Educate employees about the importance of confidentiality and the potential consequences of breaches. Train them on how to handle sensitive information.
- Secure Digital and Physical Data: Encrypt electronic data and ensure secure backups. Regularly update and patch software to protect against cyber threats. Lock confidential documents in secure cabinets or rooms. Use shredders to destroy documents that are no longer needed.
- Use Secure Communication: Use encrypted communication methods for sensitive discussions and data transfer, both online and offline.
- Control Internet Access: Block unauthorized access to certain websites and external devices to prevent data leaks.
- Perform Regular Audits: Conduct periodic audits to monitor who has accessed confidential data and ensure compliance with security policies.
- Ensure Legal Protections: Consult with legal experts to establish clear contractual protections and restrictions in agreements with buyers and advisors.
By implementing these measures, you can significantly reduce the risk of confidential information breaches, protecting your business’s value, reputation, and competitive advantage during sensitive transactions like a sale.
Understanding the importance of an accurate business valuation and the common pitfalls associated with SMB sales can give you a leg up in the business selling process. It’s a complex process that’s best not to face alone. An experienced business broker has expertise in business valuation, and they’re also your safeguard against confidentiality risks during a sale because they can identify potential breaches and how to mitigate them. Vigilance in protecting your business’s confidentiality is critical in any sale.
Up next, we’ll cover how to attract multiple offers to maximize value and negotiate a sale with more leverage. We’ll also discuss how to navigate letters of intent (LOI) from buyers to set the stage for more productive negotiations.
At Viking M&A, we understand the intricacies of business sales, and we’re dedicated to helping owners get the most from these opportunities. Our team of experienced professionals specializes in providing invaluable support throughout the entire selling process. From accurate business valuation to attracting offers, negotiating, and closing the deal, we’re here to assist you every step of the way. Contact us for a no-cost, no-obligation valuation of your business.
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Sell Wisely, Part 2: Evaluating Unsolicited Offers
