Most middle-market business owners will sell just one business in their lifetimes, if at all, so it goes without saying that he or she probably won’t be an expert in the mergers and acquisitions process.
If you’re thinking about selling a company, it’s important to educate yourself on the process. Seek expert guidance and avoid these common landmines that can sink a deal or prevent you from getting the top dollar you’ve worked so hard to earn.
1. Going it alone. Successfully selling a business requires the experience and advice that only experts in the areas of banking, accounting, legal, tax, wealth management, environmental, real estate and M&A can provide. Every business requires its own unique mix of experts on board to ensure a sale goes smoothly. An investment banker experienced in handling M&A deals can help sellers connect with experts they don’t currently have on board.
2. Dragging your feet on due diligence preparation. Even if you’ve never sold a business before, you probably know you need to show a buyer your financials. However, it’s easy to underestimate how much work is required to get all of your ducks in a row. As soon as you decide you want to sell, put your due diligence team in place and get to work. Talk to your investment banker about establishing workflow priorities, as they will be instrumental in advising you as to which areas need to be addressed first.
You will need to compile information pertaining to: financial statements, sales records, contracts, taxes, intellectual property, inventory, assets, real estate holdings, legal proceedings, forecasts and human resources (just to name a few). An M&A advisor can walk you through the due diligence process.
Want to learn more about the information that buyers will need from you? Read this article on the acquirers due diligence process.
3. Thinking you can minimize or obscure any company warts. Buyers usually expect to find a wart or two when they review your financials and other due diligence materials. The mutual trust that is essential to successful transactions is built early on during the due diligence process as the business owners facilitate the buyer’s or investor’s discovery of any and all vital information. Expect that buyers will do their own research on the company and that they will ultimately find all warts before proceeding with the deal.
Typically, there are no company secrets in successful transactions. If the business owner knowingly or unwittingly conceals information and the buyer loses confidence and trust, the deal could be jeopardized and fall through. Be upfront about your business from the get-go, and seek buyers who can best overcome any weaknesses or problems pertaining to your business. This approach can help reinforce trust between the buyer and seller and also minimize the risk of potential legal issues, while ensuring the company ends up in the right hands.
4. Focusing on one buyer. You may have your sights set on one buyer who you think would be a good fit to buy your company or who has approached you to sell in the past. Step on the brakes!
By talking with multiple buyers (or using an M&A firm to help you do so), you can increase your odds of securing a better deal, especially if you use an auction strategy to sell your business. Remember, scarcity is a valuable negotiating tool, using both the opportunity to gain and the fear of losing the deal can motivate buyers to bring their best price.
Learn how a reputable investment banker can help you identify and market your business to the right buyers, here.
5. Spending too little time with potential buyers to find out if they are a good fit. You’ve put your heart and soul into your business, right? And many of your key people have as well. You may also want to ensure that these dedicated employees are taken care of after you leave. If you don’t take the time to understand what the buyer’s plans are and if their culture is the right fit for your people, the business that comes out the other side may not end up turning out as you had hoped.
Schedule enough time to meet with viable buyers so you can make an informed decision about who should take the company to the next level. Mergers are like marriages, so make sure you spend enough time in the dating phase before you decide to commit.
6. Making hasty, noticeable changes to business operations. Just because your business is for sale, doesn’t mean you should put in less of an effort or invest too much time and money to make changes that won’t markedly benefit your bottom line. Because you want to keep the sale of the business confidential, any significant changes you make could get people talking, and the rumor mill isn’t going to help your cause.
Granted, some changes may be necessary in order to elevate the business’s desirability for the right buyer, but a careful cost-benefit analysis should be executed prior to making adjustments. Your M&A team can help you weigh the options.
7. Announcing that you are selling a company before the deal is finalized. Many business owners preparing to exit will seek advice from their employees, vendors, contractors or even friendly competitors. This can be a very costly mistake if word leaks out and employees start to panic (key employees may decide to leave) and/or competitors instill doubt about the company with your customers.
Your operations could suffer if employees are in turmoil and sales could drop if customers lose confidence – two things that could alienate potential buyers. Keep your plans close to the vest and only inform those who truly need to be involved in finding a buyer and preparing the business for sale.
Read this recent post on the importance of keeping your lips sealed and why confidentiality agreements are non-negotiable.
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