The Biggest Mistakes When Selling a Business: Inaccuracy

By Generational Equity

10/18/2017

When it comes to selling your business, inaccuracy is one roadblock to avoid at all costs. Being accurate is one of the keys to any successful sale, as it demonstrates to buyers where your business has come from and where it is going. But, you may be wondering: How accurate do I need to be?

This question truly comes to the forefront when creating projections for your company’s future growth. Many business owners don’t appreciate this when selling their business.

Sure, you might have compiled the most in-depth and exciting historical numbers possible from the past 3-5 years. Revenue might have increased dramatically in this period, expenses greatly reduced and you expanded your customer base two-fold. This is all fundamental information that buyers will want to know.

But it’s only half the battle. To really grab a buyer’s attention, you should also provide 3-5 years’ worth of projections for future financial growth, starting from your base year. This is because buyers are focused on the future earnings potential of your company – the past was your time of success, and they want to know the next few years will be theirs.

However, and we cannot stress this enough, maintaining accuracy is critical for two big reasons:

1. Your projections will be more realistic and achievable
2. It establishes trust with buyers

Ducking the Hockey Stick

Of course, we understand the temptation for sellers to overstate their potential to attract buyers. Our professionals at Generational Equity have seen many initial projections that blew historical numbers out of the water. This can lead to what is known as hockey stick projections:

Here is how Divestopedia defines these:

"A hockey stick projection is one that shows its last few years of actual results flat, and then magically rockets up for future years just like the blade of a hockey stick. These forecasts usually show significant growth in revenues, EBITDA and EBITDA margins".

Most buyers will be dubious to say the least if your projections follow this trajectory. Maintaining trust is vital in cementing any business sale, and this approach will immediately strain your relationship. And, even if you can push on with the deal, it is likely you will face a negative condition, from a discounted offer or insisting you stay on board for a period post-acquisition.

Indeed, in an earn-out agreement the need for realistic and accurate projections is even more pronounced. In this situation, being able to fulfill your estimates is key to achieving the optimal price for your business. So, attempts to exaggerate your financials to improve the initial offer would likely backfire in the long run.

So leave the hockey sticks on the ice rink and instead focus on producing accurate projections!

Base Year Projections

It’s essential to start strong when determining your company growth forecast. Your base year and estimate for where this year ends needs to be accurate, as it is one of the details buyers will pay close attention to. If you can’t justify this number to a potential buyer, then revise it until it makes complete sense.

No matter what the number is, you’re going to have to prepare to explain it to a buyer. So be honest and accurate. If your actual finances are trending below the projections, let them know, and if you can justify this all the better. Trust us, this is far better than waiting for a buyer to discover this for themselves when they conduct their due diligence.

Overall, we recommend thinking long and hard about where your base year begins and what that says to buyers about your business.

Would you like to learn more about what is required to complete a successful business sale? Download our complimentary white paper on the four keys to unlock this.

Alternatively, you can learn all you need to know about the M&A process at our complimentary executive conferences. Here, Generational Equity’s experienced advisors will help you take the first step in selling your business, including what historical and projected information you should include to engage potential buyers.

Are you considering your exit strategy? Find an executive conference taking place near you or talk to our dedicated team on 972-232-1121 today.