Thu, Feb 25th, 2010 Entrepreneurs who seek to maximize proceeds from the sale of their company need to be proactive in defining objectives, identifying options and developing a thorough understanding of the many elements of the sale process. Being well prepared will position your business to minimize the risks and maximize the potential rewards, by avoiding the most common and costly mistakes.
Most business owners are focused on the day-to-day challenges and activities associated with running the company and are not experienced in the business sale process, which is typically a once-in-a-lifetime event. This can lead to critical mistakes that, if prepared for, can be avoided. The time to experience the learning curve is not when selling one of your most valuable assets. Lack of proper preparation and not utilizing the right professional transactional advisors can lead to a less than desirable financial yield from the sale.
Our experience in handling the sale of hundreds of privately held businesses has identified the following as some of the common mistakes to be aware of:
Failure to consider all options in advance. Exit planning takes time and requires clearly defined objectives with careful consideration of appropriate options. An array of alternatives are available for consideration when structuring a business sale, including: retaining an equity stake in the business, selling to employees, identifying a working or investing partner, and other hybrids. There are several types of acquirers, including: strategic acquirers, financial buyers and private equity groups. Which acquirer type is the most appropriate? Which would likely perceive the highest value for the business? What is the owner’s preference for future involvement with the company? Advance consideration of these questions and options will increase the likelihood of creating an exit strategy that will achieve your criteria and goals.
Realistic valuation expectations. An inflated valuation or unrealistic expectation will turn off quality potential buyers. Owners that attempt to handle the sale of their business, with no “market value” reality, will jeopardize the potential to sell. There is typically “one bite at the apple” and once the opportunity is squandered, it is very difficult to subsequently re-approach qualified acquirers that already have a bad taste from their previous experience. Approaching the market with unrealistic pricing expectations can waste months of valuable time, cause you to lose focus on the business, jeopardize confidentiality and burn through qualified buyers. An owner should rely on a professional business intermediary to provide a business value analysis in advance, which provides a range of values likely to be achieved if a transaction were pursued at a particular point in time. This enables you to make an informed decision by determining if your valuation objectives are aligned with marketplace reality. If not, an intermediary can provide suggestions for you to implement that can subsequently better position the business to attain your goal.
Run the business as if you were going to own it for the long term. Avoid becoming fixated on the transaction. If your attention waivers from the day-to-day demands it can negatively impact sales and profitability. The sale process is typically a protracted period and a buyer needs to know that they are acquiring a business that continues to perform well as the closing approaches. Even with five consecutive years of strong historical earnings, if the interim financial performance during the sale process demonstrates erosion, the acquirer can be concerned that there are negative changes impacting the business that may be your underlying motivation to exit. It is critical to drive the business harder than ever during the crucial business sale period. Utilizing a professional business intermediary enables you to focus your efforts and attention on running the business and maximizing its performance, with a comfort level derived from knowing that the transaction process is being professionally managed.
Confidentiality. It is very difficult for a business owner to handle a transaction directly without compromising confidentiality. With professional representation, it is rare that competitors, employees, vendors or customers will become aware of a pending transaction. Intermediaries typically present the sale as a business opportunity without identifying your specific company. A breach of confidentiality surrounding the sale can change the course of the transaction and have a negative impact on the business.
Advanced preparation. Advanced preparation increases both the probability of selling a business and the valuation that will be achieved. Certain things may require years of advanced preparation such as introducing new products or targeting new markets, while other important initiatives only require short term planning and preparation to best position the business for sale. Areas include having current and well organized books and records; anticipating and addressing any environmental concerns; negotiating critical lease extensions; eliminating non-utilized equipment and inventory; cleaning-up the facility so it presents well; and, anticipating and being prepared to answer probable acquirer questions. It is important to understand what information a buyer will require and have it ready for presentation in advance.
Not seeking the right professional advice. The sale of an entrepreneur’s business is frequently the largest and most important financial event of his or her life – for most, it is a once-in-a-lifetime event. The successful sale of a business requires a carefully planned and methodically structured process during which each step is handled correctly the first time in order to maximize the financial reward. Owners are experts at successfully running their companies, but few are prepared to navigate this complex process; therefore, they are at a distinct disadvantage when attempting to properly present the intangible values and negotiating with experienced strategic and financial buyers. This is vastly different than typical negotiations that are part of day-to-day business. A professional intermediary provides invaluable advice, support and representation – most importantly, the benefit of experience that can make the difference between a successful transaction and a missed opportunity.
Selecting the wrong buyers. All too often business owners will focus on prospects they already know – vendors, customers, employees or competitors. Buyers such as these frequently lack the means and motivation to pay what a company is really worth compared to more sophisticated buyers who have strategic acquisition goals and are willing to pay accordingly. In contrast to local buyers, or those known to the business owner, some of the most qualified are often among the most unforeseen. For example, companies – both public and private – often pay premium prices to acquire seemingly ordinary businesses that offer a synergistic advantage to their current operations. For many, private equity groups are among the most desirable potential buyers. Foreign buyers also play a role in realizing optimum value for U.S. companies. A business owner is not typically intimate with these markets and therefore may miss out on an opportunity to maximize the transaction.
Improper or incomplete documentation. Documentation prepared from the perspective of potential buyers can present a company’s past as a valuable, saleable future. Complete and well-prepared documentation will reflect a realistic, defensible foundation for the company’s value and substantiate buyer expectations of future earnings and return on investment. This will provide a basis for meaningful comparison with other investment opportunities and present a detailed, accurate and strategically compelling portrayal of how the business is likely to perform in future years. The documentation provided to a buyer should highlight the intangibles of the business as well as key expansion opportunities that the business is positioned to capitalize on.
Providing undefended financials. A common mistake is to provide potential buyers with internal or accountant prepared financial statements and corporate tax returns. This is a fundamental error. Financial statements are prepared for tax purposes, not for business sale purposes, and do not accurately reflect the true profitability and potential earnings capability of a business. Proper interpretation and presentation of financial information is a critical step in the sale process. Acquirers must be presented with an adjusted or “recast” format, to ensure that they are able to “read between the lines” of the financial statements and tax returns to appreciate the total discretionary pre-tax income that would be available to them. Failure to properly present true “recast earnings” reduces the perceived value of a company. When reviewing financial presentation, we analyze more than 60 potential recasting adjustments.
Dealing with a single buyer. Without multiple buyer prospects, a seller has fewer options and limited leverage in terms of obtaining the desired price and terms. Multiple buyers in the mix will create a competitive environment and instill a sense of urgency into the buyers involved. When there is one buyer candidate the buyer is in control; when there are multiple potential acquirers, the seller is in control. Having multiple options increases negotiating strength by creating less dependency on any one potential acquirer, while the perceived competition drives up the purchase price. Providing a fall back position in the event that a particular negotiation derails for any reason, increases a seller’s leverage throughout the process and avoids the pitfall of having to restart from the beginning. Experienced buyers are less likely to attempt to take advantage of a situation if they perceive that there are additional interested parties and professional representation.
Focusing on the past. It is common for business owners to focus on past performance when valuing a firm and presenting its attributes. Conversely, acquirers primarily consider strategic or synergistic acquisition goals and base their decisions on the company’s future earnings potential and its ability to produce the desired return on investment. Business owners seeking to maximize value should explain the past and sell the future, along with any initiatives that are in place but have yet to be reflected in historical earnings, along with potential synergies derived from the acquiring company. It is important to present specific expansion strategies that could be implemented going forward. This will build value and increase the interest level of acquirers.
Mentioning a selling price. Whoever mentions price first oftentimes loses. For sellers, it pays to focus on value – a company’s optimal earnings potential and future return on investment. This focus, in combination with a carefully structured growth plan that properly positions the business in the marketplace, accurate and compelling documentation, access to the right buyers and favorable timing, will serve to determine optimum market value — what a buyer is willing to pay. Always let the buyer present an indication of value. This is a good barometer to determine if they have been properly educated to the intangible values, acted in good faith, and are the type of people you want to form an ongoing relationship with. This also offers the potential to be pleasantly surprised by their offer.
Transaction momentum. One of the biggest transaction killers is the loss of momentum during the sales process. Anticipating the information a buyer will need and issues that may potentially bog down a transaction can avoid major slowdowns in transaction momentum. The Letter of Intent should have a timeline that the buyer must adhere to, such as a deadline to complete due diligence or date that they must present evidence of a financing commitment. Press your professionals to generate and review documents as soon as realistically possible. Transactions drag on if not monitored, which leads to second guessing, over scrutinizing, strained relationships and ultimately may cause the transaction to fail.
While this is not an exhaustive list of the mistakes that can negatively impact a business sale transaction, many common mistakes have been identified. Transactions are challenging enough even when everything is handled the right way. Avoiding the common pitfalls highlighted in this article will go a long way to maximizing the value and probability of a successful transaction.
