Avoid common pitfalls in closing your business sale.

In the book, Good to Great, author Jim Collins laid out a framework followed by management teams he studied that effected revolutionary change for their companies. The journey toward exit is your last opportunity to bring the company to new heights–and if there ever was a time to make sure your company is as great as you can make it, it’s when you’re preparing to cash out.

In the middle of Collins’ list of seven principles is Chapter Four: Confront the Brutal Facts. As you contemplate the sale of your business, one brutal fact to understand is that your exit transaction is not guaranteed. 84% of advisors polled indicated that less than half of sellers are prepared for a sale when they first enter the relationship. Fully one quarter of the respondents estimated that fewer than 5% of sellers are ready.

Your entrepreneurial confidence and skill pitching your products and services has likely been a big driver of your success in building and growing your company. And it is certainly a skill that will serve you well as you work with your advisor to market your business for sale. But the very qualities that drive entrepreneurial success will only go so far as you head into a sale of the company, and they can even lead you to adopt a blind spot when addressing deficiencies that will be sticking points for buyers. Potential buyers will have concerns about your business that you may consider minor, and they will have standard expectations for things you routinely and comfortably operate without. But in an exit, you are usually selling the buyer on the business’s ability to thrive apart from you, and your efforts to trivialize certain issues will likely fall flat.

Some common issues that derail the sale process include:

• Lack of formal exit planning. Entrepreneurs, particularly serial entrepreneurs, tend to be high-velocity decision makers, and dithering isn’t in their nature. When it comes to an exit decision, however, delaying action for a robust and thoughtful planning and preparation period reduces risk and leads to better outcomes. Things rarely unfold in an ideal manner, so it is very likely you didn’t start planning your transaction the recommended three to five years in advance. A wide range of sudden changes can speed up or slow down your timeline. But if you are reading this early enough, start your education process now: become familiar with the different participants in the M&A space, think about the kind of buyers to which the business would appeal, and do some research into what makes for a smooth transaction. Getting to know transaction advisors two to three years in advance will put you in a position to ask questions and learn about the process. Selecting an M&A lawyer and a transaction advisor are highly trust-based decisions, so give yourself time to make them after appropriate consideration, as well as to determine who else may be necessary for your deal team and what other preparatory actions you need to get underway.

• Failure to define the ideal outcome. What are your long-term personal and business plans after the transaction? Have you considered your assets, liabilities, and net worth? What are your aims for management and family members involved in the business? Have you shared your vision with your advisor? What dependencies does your vision have on the terms of your transaction? It is important to assess your personal balance sheet, establish goals for lifestyle, and wealth transfer, and your next business undertaking, and get on the same sheet of music with your advisor about what the deal would need to look like to make that happen. This may require proactive measures for the business leading up to your sale, but it may also reveal disconnects that require you to tweak your expectations. Working together with your advisor to narrow the gap between what is desired and what is realistic will keep you working toward the same goals.

• Running too narrow of a sales process. This danger looms largest for middle market companies whose transaction is advised by an M&A advisor or investment banker. The marketing processes for these deals are heavily dependent on the competitive environment fostered by timing multiple potential buyers’ management meetings in close proximity and setting a deadline for indications of interest. Each company represents a unique opportunity There are some instances in which the seller is looking for a specific kind of partner, and their M&A advisor may market the company to only five or ten targeted buyers with a focus on engineering the right deal for the seller. But generally, the greater the number of appropriate potential buyers that are given the opportunity to make an offer, the more competitive the offers will be. When the advisor does not solicit their network broadly enough, it creates the danger that few if any indications of interest will ultimately be received and jeopardizes the ability to negotiate a deal at the seller’s target price.

• Lack of cleanliness and integrity in the financial statements. Deficiency in controls over financial accounting and reporting are unforced errors on the part of the seller. Having a qualified bookkeeper close the books and reconcile financial accounts each month is standard practice owners should be following. But even if the bank statements reconcile to the books, poor design of the company’s chart of accounts and/or lack of consistency or outright errors in how transactions are booked will result in sloppy financial statements that are unreliable at best and unreadable at worst. Many entrepreneurs focus on operations and think little about accounting, other than monitoring their bank account level and reviewing credit card activity. But owners need to understand the importance of properly investing in accounting, ensure their accountant is up to the task, charge them with the mission of designing clarity into the financial statements, and actively participate in helping their accountant do that by providing the necessary business insight. Beyond that, owners should review the financial statements monthly to ensure discipline over the books is maintained. If your revenue is above $10 million, consider moving your financial statements from cash to accrual basis. And at some point, you’ll have to consider having your financial statements audited to secure an additional level of credibility, and these steps will be hard prerequisites for that.

• Lack of familiarity with the numbers. Unresolved disconnect between the financial statements prepared by the accountant and the methods the owner uses to monitor the company’s performance effectively renders the financial statements irrelevant to the management of the business. This is the typical result when owners regard accounting as an exercise whose only value is capturing information for the tax return, and it ensures financial accounting and reporting deficiencies will never get the attention they need. Even entrepreneurs who are able to articulate their numbers wind up with a narrative that isn’t clearly born out in the financial statements, frustrating conversation with prospective buyers.

• Duplicity during buyer due diligence. Some estimates attribute as much as 70% of failed exits to due diligence-related issues. But thinking like a buyer and understanding the tenets of the due diligence process will increase your deal’s chances for success. The buyer will be forking over a not insignificant sum for your business. They will look under the hood before closing. But due diligence isn’t something you want to become educated about right before it begins; you need to know what is coming early in the deal process so you can conduct all of your interactions with potential buyers the right way. If they conclude there have been ethical lapses, their trust will be diminished. If the buyer’s quality of earnings (QoE) review reveals the seller has intentionally overstated earnings, it will spell the end of the deal. But the buyer’s financial analysis may reveal other undisclosed issues, such as deferred maintenance and capex, that can lead to price concessions at best, or even diminish trust to the point of threatening the deal. Well before starting to guide you through the due diligence process, before making a market for your company, your advisor should prepare you for due diligence as an integral part of preparing your company for sale.

• Poor financial performance during the due diligence period. Whether due to normal economic cyclicality, nonsystematic risk of the business, or simply losing focus on the business because of being distracted with the deal process, disappointing financial performance during the due diligence process can upend the deal. While some drivers of volatility are beyond the seller’s control, it is critical for you to maintain operational focus throughout the deal process. Owners may be able to motor through unfavorable profitability variations during most of their holding period. But they are particularly costly during a sale, as they can have an outsized impact on transaction price, or may squash the deal altogether.

• Letting emotions get in the way of good seller judgment. Being open to resetting the sale price if performance or findings during the diligence period warrant it may be the best course of action for the seller. But lack of seller flexibility as the process pans out can halt a deal. Emotions can get the better of you during the due diligence process as well. Buyer questions can feel invasive, and they realize this. It is not uncommon for sellers to regard the process as abrasive at points. Regardless of how big your deal is or how your due diligence team is comprised, understand why the buyer’s inquiries are important, recognize that the intention behind them is legitimate. Acknowledging that all sides are trying to get to the same outcome will help you respond dispassionately to rough patches in the due diligence process.

There are no quick fixes for many of these challenges. The approach that is most suited to success is putting the exit on your radar years in advance, planning for it, and tailoring operating decisions accordingly. If you are already on the path to exit, make sure you and your transaction advisor are having an open dialogue about weaknesses and how to deal with them before you enter exclusivity and the intensive scrutiny from the buyer starts.