Through the years it always seems to be the same mistakes lower middle market and “Main Street” business owners experience when selling their companies. Below are the most common, and oftentimes the most damaging mistakes made when attempting to complete a divestiture. Take them to heart, always be mindful, and the exit process and final transaction will be a success.
The Most Common Mistakes Owners Make When Selling Their Company
1. Waiting too long to sell!
Know that 80% of all businesses listed for sale – do not sell! That’s right, they go unsold and eventually out of business. The interesting aspect is, that at one time, many of these businesses were very salable. Owners just waited too long. Situations changed, outside events (personal, changing markets, consumer disruptions, health, declining sales, losing key clients or key employees etc.) dramatically altered the company’s future. The value of the business abruptly vanished, sometimes within weeks or months. Your life’s work suddenly disappears and your planned exit – closes in your face.
Selling a business starts with the recognition that someday you will have to sell. Prepare both the company and yourself – starting today.
2. Over Valuing Your Business and Unrealistic Expectations
This is the first big mistake. And made by too many, too often and which only leads to frustration, confusion and unnecessary delays in discovering a “real buyer”. Over valuing your company!
The owner should understand that the buyer is buying a business that he/she can make money with, not what you (the owner) think they should be making.
Look at your business dispassionately. What would you pay for it?
You and your business advisor should analyze the company, its cash generating capabilities and derive an understanding of what the value range should/could be – before it is even listed. The buyer will pay a fair market price – not a seller’s “pipe dream”. Understand fair market value and who the best audience (ie., type of buyer, Strategic/ Synergistic, Investment Groups, or Individual Investor/Entrepreneur) might be to acquire the company. A business usually will have a different value to different “types” of buyers. Identify buyers who will value it the most.
An experienced business broker will attempt to simultaneously bring, if and when possible, multiple participants into the divestiture conversation and advance an atmosphere of competitive buyer tension.
3. During Due Diligence Neglecting the Day-to-Day Operations of the Company:
Once you have entered the adventure of divestiture, never, ever, let up in the operation of your company. It happens all too often, a LOI is agreed to and signed, due diligence begins and ownership relaxes thinking the deal is done. The deal is never done until hands are shaken and proceeds distributed – to everyone. Due Diligence is only the beginning, not the end of a transaction.
The business’s performance must be maintained or problems emerge from every direction – the buyer, attorneys, bankers, and employees. Be engaged actively until the very end. The completed sale!
Remember, a “trailing twelve month” P&L is often requested (particularly if a financial institution is involved) before the closing table. If you are down 10% or more on top line revenue or company cash flow, from a year to year comparison, you may have to revisit the negotiating table or postpone “closing” for a period of time.
A very common misconception is that a buyer is the one buying a company. In reality, the financial facility/bank is often the “buyer” and the individual buyer is just the new “owner”. “Mr./Ms. Banker” becomes the ultimate decider of a transaction’s negotiated viability.
Interestingly, more deals collapse during the due diligence phase than you can imagine. The old adage among business brokers is a deal must die three times before it can finally be completed. If the deal were to die, completely, then what would you do? Are you prepared?
4. Over Estimating the Forecasting of Your Company’s Future Business:
The lifecycle of selling a business can take nine to eighteen months or longer and due diligence another two to six months or more, depending on the complexity of the deal.
Be prepared and understand that at certain points along the process cycle you will be asked (by the buyer or a financial institution involved) if you are maintaining your business’s financial forecasts. If not sustaining forecasts, or if there is a discernible negative change, it could be a deal killer or lead to a re-negotiation of pricing and/or terms. This is particularly true when financial institutions are involved and the valuation is predicated on substantial future growth projections. Carefully consider the financial projections, sales goals and results – and closely monitor the activity.
5. Failing to Manage Deal Fatigue: Giving Up Too Soon
Deal fatigue is something that both the seller needs to understand and the Business Broker always cognizant of – when preparing a client (the seller) for this long and emotionally exhaustive experience.
The seller needs to appreciate that the transaction cycle is a marathon, not a sprint. There are always moments of frustration and discouragement. Mindset, by the seller, from the very beginning is extremely important. Be prepared and bring your patience.
6. Not Maintaining a Transaction Cadence:
One critical aspect moving through Due Diligence, and often neglected, is establishing and maintaining a transaction cadence. Make sure, before you even start, that the attorneys, accountants and business advisors are aware of a timeline and everyone acknowledge that all need to work (as best they can) and commit to conscientiously following each step of the discovery process. Time can and does kill many deals. Particularly when producing information requests. Keep everyone involved and moving forward.
7. Not Qualifying a Buyer:
This happens more often than is necessary. The buyer must be thoroughly vetted and they must understand what is required as everyone moves through the divestiture process. Examine and know a buyer’s professional background and ownership capabilities. In addition, how will they fund the transaction? Is the buyer financially qualified to accomplish the acquisition? Specificity is important. Show us the money.
8. Your Management Team and Staff Hear and Feel Rumors:
Confidentiality is critical! Be aware of the destructive force of the “rumor mill”.
Rumors or confidentiality breaches can really damage the deal structure and/or affect the company’s performance and/or cause key people to begin looking at alternative employment situations. I have witnessed this before, key people – hearing about a pending sale, several days before closing, confront the current owner with demands for higher salaries, and/or benefits and/or working conditions. The result is, through no fault of the owner, business performance or the transaction structure begins to deteriorate and/or possibly collapse. Confidentiality is critical to a successful closing. Tell no one – until after the deal has been completed.
9. Managing a Must Sell Situation:
It happens too often, when a seller reveals through a conversation with the buyer, that they are planning on moving out of town, or growing weary of operating the business, or they are just overwhelmed at how fast the current business environment is changing. The seller conveys urgency to conclude a sale. It opens the window to receive under-priced offers and/or terms and conditions counter to the interests of the seller. Owners should always be careful not to reveal any frustrations and/or impatience with the process. A business broker’s participation is invaluable to both protecting the interests of the seller and the transaction.
10. Not Organizing Key Employees to Remain Post Transaction:
All buyers will be very concerned that key members of the management team and organization will remain post transaction. Have in place contracts and incentive programs that help bind key people to the business. These key employees are extremely important assets of the business. They are critical to the operational success of the organization. Treat them as such.
11. Crafting an Open Ended Letter of Intent (“LOI”):
Before even entering Due Diligence with a prospective buyer, have your representative review and insist on a detailed, comprehensive LOI that satisfies both the buyer’s needs and the seller’s objectives. The LOI should be clear and complete in all the areas of requested documentation.
When you agree and sign a LOI, it is at that moment – you – the owner – relinquish control and power of the transaction process to the buyer.
Negotiating leverage has now rotated!
So LOI clarity, a mutually agreed upon time-line and transaction commitment must be spelled out. It just saves participants aggravation and everyone legal and advisor expenses. Make sure the lawyers, both sides, get the memo! You and your Business Broker want to sell a business, they (lawyers, advisors etc.) want to sell time.
12. Failing to Consider Your Ability to Work with New Ownership through The Transition:
Remember, post transaction, there will be a “transition period”. It could be 2 months, up to 12 months or longer and in some instances consulting agreements beyond. Make sure you can have a comfortable working relationship with the new owners. This is especially critical when an “earn out” is involved.
13. No Fall Back Plan:
It is more common than you think, that a transaction goes up to the closing table and the deal falls apart, or during the long and exhaustive due diligence process, the principals grow weary, and at times angry, and say – enough. Is there a backup plan? Are you prepared to continue operation? Are additional buyers available to be contacted?
The deal is never done until the deal is really done, that is…,
you have the money in the bank!
These are some of the more common mistakes and areas that sellers fail to consider. A professional business broker’s responsibility is to guide you through this exhaustive process. So prepare yourself for what is to come, keep in mind the above challenges, and marshal all of your patience, for in the end – yes – it will work out well!