Most business exits are unsuccessful, or at least fail to fully realize their potential value. The problems often begin with the owners, but can extend down the chain, affecting an entire business culture and making a successful transition nearly impossible. So what goes wrong? Here are the 12 most common pitfalls that destroy transitions—often before they even get started:

  1. Unclear owner goals. This includes contradictory objectives when there are two owners (or sometimes when there is just one). There may also be internal family brawls over the business that make it difficult to set clear, specific, rational goals.
  2. Poor understanding of cash flow as it relates to price. Your exit depends on a third party’s expectations of your company’s future cash flow. If you cannot explain or understand cash flow as it relates to your valuation, this does not inspire buyer confidence. Remember that your valuation must be buyer-specific, as each buyer will view value differently.
  3. No estate plan. If you do not know the difference between a business and owner estate plan, you have a problem. Your estate plan protects both your family and your business, but the two are not the same.
  4. Failures of company structure and asset protection. If your company is not well structured to protect its assets, this is a huge red flag to buyers. You must identify key intangible assets and embrace appropriate legal protections, including patents and trademarks where appropriate.
  5. Issues with co-owners. Every ownership team has disputes. Without the right agreements, these disputes can become nuclear. If you have not agreed to how your company will be purchased, sold, or funded in the event of a sale, disability, divorce, retirement, or more, serious disputes become inevitable.
  6. Poor management of personal wealth. Your company is not a vehicle of personal enrichment. If you have poorly managed your own funds, you might endlessly draw on corporate resources, reducing value and disrupting your balance sheets.
  7. Unsustainable business growth. Your company needs an effective, realistic strategic growth plan, including for times of transition and downturn. There must be continuous brand improvement and innovation, as well as growing profitability.
  8. Incapable leadership and poor management successor options. There must be good leadership in place so that the company can operate in the owner’s absence. There must also be a clear, objective process established for replacing key leaders.
  9. Not maintaining the business in an always-ready-to-sell state. Your company could always face an offer. Be prepared to answer bids with a company that’s packaged well and ready to go.
  10. Neglecting pre-exit tax tools. Minimize taxes ahead of the exit, and on time.
  11. No capable buyer. There’s no capable buyer in your industry, you have not groomed an appropriate insider, and you have not set up your business such that it is appealing to an investor.
  12. A poor understanding of the M&A market. You can’t sell to a third party because you have a poor understanding of the M&A market, have not addressed your business’s weaknesses, and have not gotten appropriate outside advice.

About Madison Street Capital
Madison Street Capital is an international investment banking firm committed to integrity, excellence, leadership and service in delivering corporate financial advisory services to publicly and privately held businesses. Over the years we have helped clients in hundreds of industry verticals reach their goal in a timely manner.

Our experience and understanding in areas of corporate finance and corporate governance is the reason we are a leading provider of financial advisory services, M&A, and valuations. With offices in North America, Asia and Africa, we have adopted a global view that gives equal emphasis to local business relationships and networks.

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