Five big mistakes owners make when selling their company
Business owners dream about the day they sell their business – a big check, a little rest and relaxation, and time off to pursue hobbies (or time to about their next venture). This vision of the “good life,” however, most often requires that they get the most out of the sale of their business as possible.
But business owners often make several common mistakes when they go to market, each of which can decrease the value of what is often their greatest asset. Although certainly not exhaustive, the five mistakes we see most frequently are:
1) Failing to Plan. In order to maximize value from a sale, a business owner should be planning for the sale of his or her company from the very first day of operations. The riskier or more volatile a company’s earnings, the less those earnings are worth to a buyer. As a result, a solid exit plan must include risk mitigation techniques for each of these risk factors, which often change over time. In addition, business owners should plan to sell their business “on the way up” – in other words, don’t wait until you are tired of the business, operating results are flagging, or the market has turned. When the business is on the way down, it is much more difficult to get a deal done, and valuation suffers significantly. Finally, a business owner must understand what their financial requirements will be after a sale – if the sale proceeds after taxes are not sufficient to support their ideal lifestyle, the business owner either needs to plan to go back to work, or they need to work on increasing the value in their business so that they can hit their financial objectives.
2) Negotiating a One-Off Deal. We get three or four calls a month from business owners who want to know if the acquisition price their competitor or major partner just offered for their company is “fair.” Our answer is usually an unsatisfactory, “We don’t know.”
Four out of five of these “one-off deals” never close, and they end up wasting a lot of time for business owners – time that could be much better used to build value in their company. Without a competitive process to produce several offers, a business owner cannot hope to maximize the value of their company. More importantly, without understanding what the overall market thinks of their company, they can never know whether they left money on the table with a one-off deal, as attractive as it might seem. Without a competitive process, it is also much more difficult to keep a specific buyer “honest” – without a credible alternative, a buyer can stretch out negotiations and due diligence to the point where a business owner might feel like he or she has no choice and must close a less than ideal transaction. Do the work – get several bidders to the table.
3) Racing to the Letter of Intent. Doing deals is exciting, particularly when lots of money is at stake. Too often, sellers race to complete the letter of intent in their haste to “get a deal,” and they neglect to address important issues that will come back to derail their deal, but only after they have invested significant time and money. These details can include not just purchase price, but the structure of the transaction, liquidity issues post-closing, non-compete terms, tax concerns, employment agreement provisions, or even problems with their business that will come up in due diligence. Handling these issues early and deliberately, particularly problematic due diligence items, will greatly enhance the likelihood you will resolve them to your satisfaction. Dealing with them late in the process can kill or delay a deal or make the terms much less attractive
4) Focusing on Winning – Forgetting Your Goals. Enteprenuers want to win. As a result, in the heat of a deal, they can sometimes negotiate past the point of getting what they want – because it is their nature to get as much as they can. However, once your financial and other goals are met by the terms of a deal, focus on getting the deal done. A busted deal won’t help you get to your objectives, and will likely harm your business.
5) Forgetting the Business. Deals take a lot of time and are emotionally taxing. Business owners who allow themselves to be consumed by the deal often pay less attention to their business, which can hurt operating results. Nothing will kill a deal faster than declining financials, and even if the deal does not die, the value of the deal will certainly suffer. Pay attention to the business, and let your advisors deal with the transaction. It’s worth the money.