Editor’s Note: This story is part of the series "Entrepreneurship: Square One and Beyond," a Next Avenue initiative made possible by the Richard M. Schulze Family Foundation and EIX, the Entrepreneur Innovation Exchange
Sarah had built her consulting business over 22 years. Now, at 65 and poised to begin collecting Social Security, it was time to sell. She found a buyer. They agreed to a price. Everything was proceeding smoothly. But during the due diligence process, the potential buyer’s legal team raised a concern. Without Sarah at the helm, there really wasn’t much to sell. Clients worked with Sarah, not the business. Valuation dropped, and the deal nearly died. What Sarah had built was more than a job or a business. She’s not the only one.
This is just one of the issues that entrepreneurs can face when buying or selling a business. And there are a lot of them. McKinsey & Company reports that almost six million small and mid-sized businesses will experience ownership transitions by 2035, representing up to $5 trillion in value.
Whether buying a business for the first time, selling a company they’ve built over decades, or deciding whether to walk away, the stakes have never been higher. The good news: the most common mistakes made by current and would-be entrepreneurs are highly avoidable.
The Three Paths: Buying, Selling, and Walking Away
There are a lot of choices to make and issues to ponder when buying or selling a business. Each one comes with distinct risks and requires different preparation. The businesses that succeed aren't necessarily the ones with the highest revenues or fastest growth. They're the ones where owners have thought clearly about what they're doing, and why, before making that final move.
“The businesses that succeed aren't necessarily the ones with the highest revenues or fastest growth.”
Buying: What to Look For and Look Out For
It’s probably understandable that most buyers are focused on price. But, Minneapolis business attorney Aaron Hall says, that’s backwards. Hall has advised owners on buying and selling companies since 2007 and, he says: "The bigger risk is everything that comes with it," Hall explains. "Like the unpaid taxes, the lawsuit no one mentioned, and the customers who leave when the founder does."
Due diligence is a critical part of the process. Due diligence, as the term suggests, is all about digging deep into the details of a business before making a purchase decision. It’s not an add-on or an optional step.
“The most common regret I see is skipping real due diligence,” says Hall. “Verify the financials, confirm who actually owns the assets, and look hard at customer and key-person concentration.” He adds: “Whether the deal is structured as an asset purchase or an equity purchase matters a great deal, because an asset purchase often lets a buyer leave old liabilities behind.”
“The most common regret I see is skipping real due diligence ”
Undisclosed liabilities are a classic risk, Hall says. These can include back taxes, pending claims, employee disputes, and personal guarantees that may “quietly survive the sale.”
Don’t be afraid to ask hard questions about customer relationships. In fact, make sure that you do. How many customers represent the bulk of revenue? Are they loyal to the business or to the owner? What happens when the founder walks out the door? Erik Gfesser, an acquisition entrepreneur and president at Fesswise LLC, emphasizes that business transferability or the ease with which the business can move from seller to buyer is crucial.
Standard operating procedures can help with transferability. But, Gfesser points out, “there are also key person risks to consider when operational knowledge or business relationships are concentrated in one or just a few individuals who might leave the business following purchase.”
Gfesser also notes that buyers need to pay attention to commercial risks: “Whether revenue is likely to continue to hold following purchase and whether growth can continue.” For example, he says, if significant revenue comes from a small group of customers, that may represent a risk. “The skills of a buyer will have an impact on whether a given business can be improved, but some business issues can be out of reach due to the nature of the broader industry and other external factors,” he says.
It’s not just buyers that must beware. Sellers need to exercise caution as well.
Selling: What You Need to Do Before You Talk to a Buyer
The biggest mistake sellers make is starting too late, according to Michael Benedict, Senior Vice President and Business Transition Advisor at BOK Financial, who says he sees this constantly.
"Proper preparation is the most important element of selling," Benedict says, which means starting 12-18 months before even approaching a buyer.
There are a number of steps in proper preparation:
- Getting a realistic valuation. Owners have a tendency to overestimate what their business is worth, says Benedict, who recommends getting a professional opinion of value from a sell-side M&A advisor (often free) or certified business appraiser (fee-based). It’s also important to understand what actually creates value, says Renee Russo, founder of Rise Up Business Coaching, and member of the Exit Planning Institute (EPI) Thought Leadership Council. A profitable company isn’t necessarily a valuable one, she says. “A valuable company is one that can continue creating value long after the owner has stepped away.”
- Cleaning up financials and documents. “Banks and SBA lenders underwrite on documented cash flow,” says James Crothers, founder of Let's Talk Business Plans. “They'll only count the add-backs you can actually prove,” he says.
- Planning for taxes. One reason owners have a negative sale experience is that they're surprised by the tax consequences, Benedict says. “Some portion of the transaction may be treated as ordinary income versus capital gain,” he points out. Benedict recommends having a qualified tax professional provide a hypothetical tax analysis in advance. For owners with philanthropic interests, charitable gift planning can also produce significant tax savings, he says.
It’s also important for potential sellers to think long and hard about whether they really want to sell and what will happen after they do. “It’s common for owners to experience post-transaction remorse,” says Benedict. In fact, a PwC survey featured in the Exit Planning Institute's 2023 National State of Owner Readiness Report found that 75% of business owners who sell their companies experience profound regret within one year.
Owners he’s worked with that didn’t suffer that remorse, says Benedict, found something new to be passionate about. These have included “starting a new business related to a favorite hobby, missionary service, diving more deeply into the lives of grandchildren, and moving to a foreign country and immersing in a new culture.”
Buying or selling a business are big decisions. Knowing when the time isn’t right is another important consideration for entrepreneurs.
“It’s common for owners to experience post-transaction remorse.”
Walking Away: When to Know It's Not the Right Deal, or the Right Time
Not every deal is worth doing. Crothers stresses. “Sometimes the right move is a hard no. Knowing that before you're emotionally invested is what separates a good transaction from a painful one."
Ben Levitan, a 4x CEO and former investor, has watched deals fail at the eleventh hour because the parties misread the signals. "Most corporate transactions fail," he says, "and everyone has to be on the lookout for the signals of future failure, starting with transaction terms, not just purchase price."
Red flags for buyers: Hall stresses the importance of verification: "Verify the financials, confirm who actually owns the assets, and look hard at customer and key-person concentration.”
Don't skip due diligence to save money. Crothers warns: "The single most common mistake I see is skipping a quality-of-earnings review because it feels like an extra cost. It isn't. It's the thing that tells you whether you're buying a real business or buying someone else's exit problem."
Red flags for sellers: Klint Kendrick, an acquisition entrepreneur who has been on the buy side of more than 150 deals, identifies the most dangerous red flag: emotional unreadiness. "Sellers often understand the financial terms of the deal, but they do not always fully absorb what it means to sell their 'baby.' It can be especially painful if the founder stays after close because they often sit by helplessly as they get rebranded, restructured, or operated in ways they never would have chosen."
Walk-away discipline isn't weakness. It's wisdom. You're about to make one of the largest financial decisions of your life. If something feels wrong, it probably is.