The great benefit of being in the middle-market M&A business for so long is that we have tabulated and calculated the common issues that we see business owners encounter all too often when selling their businesses. These mistakes are so common that we thought it would be a good idea to document them so that if you are eventually trying to find a buyer for your business, you will avoid these mistakes (if you can).
There is an old axiom attributed to Lewis Carroll that goes something like this:
“If you don’t know where you are going, any road will lead you there.”
The saying could be applied to selling a business. If you have no idea what your company is worth, any offer will suffice. Too often we meet entrepreneurs who admit that even though they want to sell their companies, they have no idea what a buyer will pay. On top of that, they have no idea how much they need to net in order to move on to the next phase in their lives.
Time and space do not allow me to delve deeply into this issue but simply put, if you have no idea what your company is worth in today’s market, how in the world will you know which offer to take? Hire a professional firm and allow them to value your company BEFORE you enter the market!
It continues to amaze us how often we encounter business owners who are trying to sell their companies with inadequate documentation. You only get one chance to grab and hold a buyer’s attention. If your documentation is spotty or, worse yet, full of errors, chances are good you will lose every buyer that approaches you.
At a minimum you will need to prepare three key documents:
An Offering Memorandum is quite simply the written version of the evaluation process we discussed under Mistake No. 1. However, it is more than simply your financials (although clean financials are vital). A complete OM should include the following:
One thing to leave out of the OM is price. Never mention price in any of your documents. Let the buyer tell you what he or she will pay.
Secondly, a Profile Letter is a one- to two-page summary of your OM. Your profile letter is what you will send to prospective buyers – so use it to capture their attention and have them focus on what you want to convey about your company.
You’ll want to include your historic and projected top and bottom line recast financials. You will also want to have a paragraph or two describing in general what the company does.Confidentiality is key here. Do not mention your company name or your location. You want to keep this general enough to protect yourself but specific enough to get a buyer’s attention. This is a challenge to do effectively.
Most importantly, once potential buyers have received your profile letter and have contacted you with interest, you need them to sign an airtight Confidentiality Agreement. Be very careful here and make sure that your CA is written by an M&A attorney so that you and your firm are protected.
At this point you might be saying, “Wait a minute. Anybody willing to buy my company would be the right buyer.” Nothing could be further from the truth. This is what we frequently observe:
After years and years of successful deal making, the best way to approach the buyer search phase is to cast a wide net. Most sellers believe that a local or regional competitor is the most logical buyer for their company. In some cases, this may end up being the optimal buyer. But if you assume that at the outset, you remove a larger group of potential buyers from the equation. You also almost eliminate what we call the “limited auction.” This is where you have multiple buyers interested in your company and you essentially get them all bidding against one another, which only does one thing: increase your company’s valuation!
Bottom line: If you approach the marketing of your company with the assumption that you already know exactly who the buyer is, you could end up selling to the wrong buyer. Starting your buyer search with only one buyer reminds me of an old M&A axiom: One buyer is no buyer.
When you sit down to negotiate your deal with a buyer, remember one thing: Professional buyers buy lots of companies every year. They know now to negotiate the best deal for the organizations they work for. They are not going to look out for you and your interests. Don’t expect them to.
Often, sellers become fixated solely on the purchase price while neglecting the importance of overall deal structure. Properly structuring a transaction is just as important as negotiating the valuation. Expertise in structuring the terms and conditions of a transaction is critical to securing and preserving maximum value.
A couple of tips to use when negotiating with buyers:
It is vital that you structure the deal so that it benefits YOU, not the buyer. In order to do that you need to be able to answer two questions: How much money do you need to have post-sale for the next chapter in your life and how long you want to stay with the new entity that the buyers will be creating? These two factors will determine the optimal deal structure for you.
Quite often, business owners tell us, “I will sell when the time is right.” When asked when they will know the right time, they usually respond with, “I will just know.”
Generational Equity believes that business owners should take a more analytical approach to the question of timing. You really have two options:
The first option really isn’t viable. Unfortunately, though, many business owners are following this scenario. Most of the time entrepreneurs are simply too busy running their companies to set aside the time to plan for their eventual exit. Although understandable, this is the worst of all possible mistakes. Eventually death, divorce, disability, disinterest or a myriad of other circumstances will force you to sell—and usually at a substantial discount to the market value. Do you really want to pursue this option?
The second alternative is the one we recommend. If you prepare your company to be “buyer ready” and plan your exit so that you optimize your valuation, you will sell when thetime is right.
Note: The right time to sell is when the market tells you it is. Of course privately held companies are sold all the time under all sorts of economic conditions. The reality, though, is that if you sell when the market is prime, your valuation will most likely be higher and you will retain more cash at closing. When is the right time to sell? Simple answer: When buyers are active, as they are right now.
As you may have heard, 2015 was a record M&A year, 2016 is expected to be a repeat; beyond that with an election coming, all bets are off. So you most likely have a nice window of time still open to find a buyer or investor for your business.
Those are the five most popular mistakes to avoid. Of course there are more than five, but these are most common. If you would like to learn more about how to avoid these and would like to find out about other common issues that impact business transitions, please contact us. Generational Equity is a leader in M&A educational services, holding dozens of exit planning conferences around the nation and Canada on a monthly basis. If you own a business, make an investment of a few hours of your time to attend. Avoiding these mistakes (and others) could be vital to your economic wellbeing.
Carl Doerksen is the Director of Corporate Development at Generational Equity.
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