Preparing your business for its sale to your final customer, the Buyer, could be the most significant business transaction of your lifetime. It is often said that you generally only sell your business once. There are no do-overs, so the time and effort invested in that 1 – 2 year period before you sell could prove to be most valuable. While there are many lists of “selling mistakes”, I can attest through personal experience to many of the following list of the top 8 or so mistakes to avoid or correct before/during your sale process.
1) Not preparing the business financially – One of the first things a prospective buyer will look at are your financials. The financials set the stage for an indication of value and possible LOI (Letter of Interest or Letter of Intent). Reliable financial records support the claim that a company is consistently profitable. In the purchase of a business, the buyer will always perform some level of financial due diligence. If the buyer is not comfortable when reviewing the company’s past financial performance, the deal falls apart, or at best a reduced value for the company. The burden is on the seller to prove that past financial performance is indicative of the future. The lack of financial integrity is one of the most common hurdles encountered during the sale process.
2) Not preparing the business to run without you – Simply stated another way…build a management team around you. Most buyers will quickly determine that if “you go”, does the business go with you”. This is an obvious risk that, if dealt with early enough can add a tremendous amount of value to your business. Buyers pay for cash flow, how many times cash flow they pay is a factor of risk. A team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. If a company’s success is dependent on a team of capable employees – not just the owner – it makes for an easy transition under new ownership. This reduction of risk will pay off with increased purchase price.
3) Delaying the process – Time kills deals. Time is money, both in extended due diligence and the risk of lower business performance, which could kill the deal. Having completed over 30 buy side transactions, our goal was 45-60 days to close from the LOI date. Assemble a team to assist you in this very time consuming, arduous process. A good “deal quarterback” who has been through the process can keep you and the deal on track. Your time is best spent running the ship to deliver your prized possession as promised.
4) No Surprises – Always be up front with any news, good or bad. Never let the Buyer find out on their own. Selling your business is more than just a process, it’s about building trust with the Buyer. If you know something, disclose it now because the buyer will most likely find out during due diligence and that could cost you a lot of time and money, not to mention the purchase price if the deal falls apart. I had one deal that closed and almost immediately 2 of the Seller’s top salespeople left the Company. We found documentation trails between the Owner/Seller and the sales reps stating their intent to leave if the company was sold, which was never disclosed to us. It was an expensive non-disclosure by the owner…he settled by giving back $1.0 million of the purchase price.
5) Unrealistic value expectations – As consistently cited in Pepperdine University’s Market Pulse Report, this is the #1 reason why businesses fail to sell. Sellers with unrealistic value expectations usually base their price on what they need or want, not what the business is actually worth. The best outcome is to determine early what your wants/needs are. Then determine the gap between what you need and what the business is worth and begin the process to add value by executing on the missing components.
6) Trying to sell to just one buyer – Having been involved in buying businesses with a pool of multiple buyers, I can truly say that this process more than any other will maximize value for the seller. Competition drives the price and the more the merrier. Choosing the right intermediary that deals with companies in your size is important to attracting the right buyer audience. That audience may consist of strategic buyers, professional financial buyers and private equity. The ultimate buyer of your business may be someone you never imagined…good intermediaries create a competitive environment through a pool of prospective buyers.
7) Inflexible deal terms – An all cash deal is the ultimate goal, but buyers generally want some form of seller financing to help them get to the finish line and to get the Buyer their final price. Cash escrows or hold backs are common and are usually settled within the first year after the deal closes. If a seller is insistent on future earnings driving a higher value, then an earn out arrangement is common and payouts are dependent on achieving the earnings targets. There are multiple ways to structure the final payout. Being flexible is key to getting your deal done.
8) Not using the right professionals – Working with an experienced business transition professional can be wise to keep your sanity and get you through the process. If you need to add value to achieve your price, engaging that person at least 1 – 2 years out is most helpful. Get investment and tax advice early in the process. It’s not how much you get paid, but how much you earn and keep that counts. Realize that your incumbent CPA or attorney may not be the best ones to advise you on the deal. You will want professionals with deal experience and their role is to advise you, not control the deal.