6 Hidden Challenges of Selling Industry-Specific Businesses

Key Takeaways:

The sale of industry-specific businesses is complex and involves a number of factors that require expertise from a professional business brokerage firm or other expert.

There are many hidden challenges of selling an industry-specific business, including business valuation, timing, confidentiality, licensing and certification, tax considerations, and maintaining performance during the sale.

Planning ahead and hiring a professional brokerage firm to handle complex legal and financial issues will help ensure a successful sale.

Most business owners are experts in their field. They know everything there is to know about the technology they developed from the ground up, the widget they design and manufacture, the consulting business they founded, or some other specific product or service.

As they go about building their business, recruiting staff, negotiating deals, putting out fires, and focusing on day-to-day operations, they likely give little thought to selling the business – until it’s time to retire, step back, or make a career or geographic move.

If the company is profitable and successful, selling may seem simple: find a buyer, negotiate a price, and move on. But there are hidden challenges of selling an industry-specific business, especially if you’re not well-versed in business sales terms and requirements.

Here’s a look at six hidden challenges of selling an industry-specific business, along with some advice on how to meet them.

Business valuation.

How much is your business worth? It can be difficult to know without consulting a professional business valuation firm. For example, where a retail business would determine market value based on inventory, cash flow, physical assets, and potential earnings, businesses in manufacturing and distribution have different ways of valuing earnings, inventory, and work in progress.

E-commerce businesses are also difficult to value, as many of their assets are intangible and reliant on digital platforms, social media presence, website rankings, and other technical elements.

One key mistake businesses make in setting market value is focusing only on physical assets like real estate and inventory. Intellectual property, industry expertise, brand value, earning potential, and more must be considered when determining the value of a business.

Timing of the sale.

Timing is paramount in business, and selling a business is no exception to the rule. Geopolitical and economic conditions, market conditions, competitor strategies, and even personal circumstances are important considerations in determining when to sell your business.

Failing to consider the timing of market conditions and sales cycles can lower the value of the sale and affect the long-term health of the business. Failure to allow planning and preparation time is also a common mistake that can weaken the sale’s value and jeopardize the company’s success.

Meet this challenge by preparing an exit strategy, ideally 12-24 months in advance of the target sale date. It’s also important to diligently track market trends, assess your business cycle, and plan for a sale during peak profit and customer engagement.

Confidentiality.

Ensuring confidentiality is a major challenge in all business sales. News of a sale before the deal is finalized can jeopardize earnings by causing employees to leave or become disengaged, investors to pull back, clients to hesitate, and competitors to take advantage of the situation.

While sharing some data with prospective buyers is necessary, it’s important for business owners to refrain from sharing trade secrets and detailed information until buyers are serious about negotiations.

Non-disclosure agreements are a must for confidentiality, with some industry-specific businesses necessitating working with experts in the field to ensure all the nuances are met. For example, healthcare businesses handle especially sensitive data that must not be compromised during sale negotiations.

Licensing and certification requirements.

Many industry-specific businesses require specific licenses to operate, and transferring those licenses to a new entity can be challenging. For example, when selling an aerospace business, ordinary asset sales are difficult if not impossible because most aerospace businesses must be on approved vendor lists, have government and aerospace or defense contracts, and operate under other licenses and certifications to do business. All of these would be lost in an asset sale.

The solution is often a stock sale, in which the buyer purchases shares from the seller, which leaves the corporate entity, including licenses and certifications, intact. A professional business brokerage firm can help facilitate this type of sale.

Tax considerations.

Many business owners look solely at the sale price of the business, failing to consider tax implications during the transfer process. There’s no easy answer to how much you’ll owe in taxes from the sale of your business, and the sale of certain industry-specific businesses can complicate the matter even further. For example, stock sales for manufacturing and distribution companies have different tax implications from asset sales.

Consulting a tax advisor or business brokerage firm can help you plan for tax implications and structure your sale accordingly. For example, it may be wise to move real estate and other non-operational assets out of the operating company before the sale, or defer taxes for several years to minimize the impact.

Maintaining performance during the sale.

The sale of a business is one of the most stressful times for a business owner. It ranks right up there with geographical moves, divorces, career changes, and family illnesses. However, responsibilities like business plans, sales negotiations, strategic operations, leadership, and monitoring competitors are still essential to maintaining performance. And if performance declines, prospective buyers might get nervous at best or back out of the deal at worst.

The way to combat this challenge is to plan ahead, using fractional leadership as necessary, and to designate experts to handle aspects of the sale, including negotiations, contract development, sales structuring, and tax planning.

Whether your timeline for selling your company is months or years away, it’s important to consider these often-hidden challenges and develop an effective exit strategy based in reality. Sales figures, detailed balance sheets, asset analysis, and more go into a successful sales plan.

Hiring a professional firm that’s well-versed in business sales for your specific industry is an important part of your successful exit strategy. Let the experts handle complex issues like licensing transfers, legal issues, and tax implications to ensure you get the most out of your sale and leave your company in good hands for the future.