I have worked with many business owners during the sale of their businesses. There are a lot of mistakes that I see business owners make during this process, so I’ve decided to boil them down into a handful of categories and communicate them here.
Timing is everything. This is a common saying, and it holds true in M&A transactions as well. We often tell business owners that the right time to sell for the maximum price is when three stars align. First, the business owner truly needs to be ready to sell. Second, the business needs to be doing well (ideally doing very well and growing). Finally, the economy needs to be doing well, and ideally, interest rates are low and potential buyers have cash reserves and access to capital. Unfortunately, to maximize price, you need all three. Two out of three just isn’t going to cut it.
You would think that the first one—being ready to sell—would be easy. However, that’s not always the case. I routinely ask potential sellers what they’re going to do after they sell their businesses, and if they don’t have a good answer, it’s a red flag. Perhaps their business is doing well and they’re hearing about similar businesses selling for significant multiples. But if they still have a lot of gas in the tank and enjoy what they do, they have a tendency to get cold feet late in the process, when they begin to think about the next chapter of their lives, and whether they really want the current chapter to be over.
The second and third ones are fairly obvious. If the business is in a downward or stagnant trend, it’s not going to fetch a premium price. This holds true in the public markets, and it’s no different for a middle-market business owner wishing to sell. And finally, if we’re in the midst of a recession and buyers don’t have cash or ready access to capital, it’s going to be tough to sell. I think back to the financial crisis that begin in 2008; we had a number of transactions in process at the time, and every single one of them just died on the vine. So, trying to sell in bad economic times will be tough, and may even be impossible.
- Not being prepared
Have you ever sold a house? If so, it’s probably safe to assume that your Realtor told you to clean, declutter, perform necessary maintenance and generally get your house in order before putting it on the market. The same can be said about a business. Potential buyers want to know that the business is, in fact, what’s being represented, and that the business isn’t going to fall apart the day after you ride into the sunset. Having well documented systems and procedures in place will help ensure this. When it comes to dealings with employees, customers and vendors, you obviously want everything to be in writing and legally enforceable. So, customer contracts, supply agreements and employee agreements need to be in place and reviewed by legal counsel before putting your business on the market.
Finally, make sure the business’s financial records are in order. Buyers are likely going to perform at least some financial due diligence, and having clean books and records, prepared using consistently applied accounting principles, will go a long way. The year-end financial statements and tax returns prepared by your external accountant will be helpful, but you need to make sure that the monthly financial statements prepared by your internal accounting staff are equally reliable. If a potential buyer can’t make heads or tails of your internal records, or finds significant inconsistencies in the records, I can almost guarantee that they are going to think it’s a riskier investment, and be less willing to pay top dollar.
- Not being forthcoming with information
This is a mistake that drives me (and potential buyers) crazy. I wish it were a rare occurrence, but unfortunately it’s more common than I’d like to admit. As a seller, if you think you can get away with withholding negative information about the business, you’re wrong. Any buyer worth his or her salt is going to discover it in due diligence. And if they don’t, the definitive legal documents will contain representations and warranties that the seller is going to have to make. At best, withholding information will likely result in a lawsuit. More likely, it will be discovered during due diligence and may crater the deal. So, be forthcoming with information—especially with your advisors—early in the process. A negative trend or event can often be framed as a potential opportunity for a buyer, and your advisors should be able to help determine the best way to communicate the information.
- Failing to continue to operate the business or making significant changes to the business
This mistake is also fairly common, especially as you get further into the sale process. The nearer to completion the process, the more sellers have a tendency to check out mentally. But it’s a mistake, and one that should be avoided at all costs. I often tell business owners that the deal isn’t done until the cash is in your hands. Up until that point, you need to operate the business as if it weren’t for sale … and that you are going to have to face the consequences of any decision that you make (or fail to make). At the same time, you don’t want to make significant changes to the business during the process, either. For example, you don’t want to discontinue a product line, only to find out that the buyer was counting on it. Similarly, you don’t want to fire key employees, only to find out the buyer had big plans for them. Both failing to continue to operate the business, or making significant changes to the business during the process, can lead to problems; sometimes significant enough to crater the deal.
- Failing to be open to offers from competitors
The best potential buyer is often the one you like the least. After all, doesn’t your biggest competitor stand to benefit the most by taking you out of the game? But for some reason, I see a lot of sellers that are reluctant (or even unwilling) to market the business to primary competitors. You need to set your personal opinions aside.
I recently sold a business to a large public company, which was my client’s largest (and fiercest) competitor. I remember my client telling me during our very first meeting that he would sell the business to the highest bidder, so long as it wasn’t them. But he (reluctantly) had a change of heart when he discovered that this competitor was willing pay almost double that of any other bidder. And I see that all the time. So, set your personal preferences aside, and decide what’s most important to you in the long run—maximizing price, or keeping the business out of the hands of your competitor?
- Not hiring an investment banker/Hiring wrong legal counsel
In my opinion, the single biggest value driver when it comes to the sale of a middle-market business is competition among potential buyers. This is where a good investment banker can be worth his or her weight in gold. The investment banker’s job is to identify potential buyers, bring them to the table, create a market for an otherwise illiquid asset, and negotiate the best possible deal for the seller. From the seller’s perspective, this competition is arguably the most important part of the process. Once potential buyers know they are competing against other potential buyers, prices and terms begin to change in favor of the seller. Often significantly. I cannot stress this enough. And while most sellers are excellent at building and running their business, most have never sold a business before. Being intimately familiar with the investment banking process, it’s hard for me to imagine a seller maximizing value by doing it on their own.
The same can generally be said about attorneys. Just because your attorney is a good general corporate attorney doesn’t mean he or she is the right person to help you sell your business. Just like a good investment banker, you’re much better off with someone that specializes in M&A transactions. Your college roommate, who is now a real estate attorney, is not a good choice.
- Not appreciating that time kills all deals
Time kills all deals. Period. The longer the process takes, the more likely it will never make it to the finish line. This is due to a number of factors, including deal-fatigue for either buyer or seller (of both), or unforeseen circumstances happening in the business.
Deal fatigue is very real, and the longer the process takes, the more likely that one or both sides are going to start to get fatigued. The excitement that the parties had at the beginning of the process begins to wane, and one or both parties may begin to question whether they want to continue. And once fatigue sets in, it becomes much harder to get things done. The parties begin to mistrust one another, begin to see the other side as being unreasonable, etc. It seems to be human nature, but once deal fatigue sets in, the parties no longer seem to perform at their best.
The unforeseen-circumstances problem is also very real. I used the example above of the recession that began in 2008. It killed every deal I was working on at the time. But my favorite example is this one. We took a business to market a couple of years ago, and set a very specific timeline of receiving offers by September 1, making a decision regarding the winning bidder by September 30, and then allowing the winning bidder 90 days to complete due diligence and consummate the transaction by December 31. Our potential buyers held up their end of the deal, but the seller couldn’t make a decision. It was another example of the best offer coming from the biggest competitor. So, the seller dragged his feet, continued to have us negotiate with potential buyers until well into the new year. We finally signed an LOI in March, and during due diligence, five of our client’s largest customers all demanded price concessions, which had the potential to reduce EBITDA by almost one-third. Needless to say, our buyer got cold feet, made a significantly lower revised offer to save the deal, and ultimately walked away. There’s no guarantee that we would have otherwise made it to the finish line, but had the seller kept to the original time line, the demanded price concessions by our client’s customers would have been the buyer’s problem.
I just recently worked on another deal where we signed an LOI in March, and the buyer wanted to complete due diligence, negotiate definitive agreements, and close the transaction in less than 45 days. My seller and my seller’s CFO both said there was no way they could get it done. I said otherwise. And although it took a lot of work and lot of late nights and weekends, I never let off the gas and we made it happen. And every time I got a little tired and didn’t think we could get it done, that little phase just kept echoing in my head.