By Russ Robb,
author of Selling Middle Market Businesses: A Guide Book for Intermediaries.
Most small business owners are not familiar with the dynamics of selling a company, because they have never done so before. There are numerous potential “deal breakers.” Avoiding the following ten mistakes should mitigate the possibility of an aborted transaction.
1. Don’t Neglect Running Your Business
A major reason small companies with sales under $20 million become derailed during the selling process of the business is the owner becomes so consumed with the pending transaction, that he neglects the day to day operation of the business. During the selling process, which can take six to twelve months from beginning to end, the CEO/owner typically takes his eye off the ball. Since the CEO/owner is the key facet to all aspects of the business, his lack of attention to the business invariably affects sales, costs and profits. Then the potential buyer becomes extremely concerned when the business flattens out or falls off. Before long the potential buyer gets cold feet when the business turns south
Solution: For most (CEOs/owners) selling their company is one of the most dramatic and important phases in the company’s history. This is no time to be overly cost conscious. At this point the CEO/owner should retain, within reason, the best intermediary, transaction lawyer and other advisors to take the pressure off him so he can devote the necessary time to run the business.
2. Placing Too High a Price on the Business
Obviously many owners want to maximize the selling price on the company which has often been their life’s work, or in fact, the life’s work of their multi-generation family. The problem with an irrational and indiscriminate pricing of the owner’s business is that the mergers and acquisition market is too sophisticated to fool professional acquirers. As a result, the business usually does not sell at the inflated price, and if the owner finally does receive an offer at a more reasonable figure, the process ends up taking twice as long as normal, thus increasing the risk of the information prematurely leaking out… which often blows the deal.
Solution: By retaining an expert intermediary and/or corporate valuation appraiser, you should be able to arrive at a price which is fully justifiable and defensible. Perhaps you might add an additional ten percent on top of their professional opinion for negotiating purposes, but if you set too high a price you could easily just be spinning your wheels. To be on the safe side, you might receive two opinions: one from your intermediary and one from your appraiser. If you set too high a price, you may end up with an undesirable buyer who fails to meet his purchase price payments and/or destroys the company from the seller’s corporate culture.
3. Breaching the Confidentiality of the Impending Sale
In many situations, when the selling process encompasses too many buyers over too long a time with too loose a system of transferring information, confidentiality is breached. It happens, perhaps more frequently than not. The results can change the course of the transaction and in some cases, the deal is called off by the owner out of frustration and disgust.
Solution: Using intermediaries in a transaction certainly helps reduce a confidentiality breach but limiting the number of potential buyers and shortening the period of time to complete the closure process also helps. A thorough clandestine approach to the selling process is paramount. Creating a believable story to tell senior management such as the pursuit of a joint venture or strategic alliance is recommended.
4. Not Preparing for Sale Far Enough in Advance
Most small business owners decide to sell their business somewhat impulsively. The major reason for selling is boredom and burn-out, and much further down the survey list of reasons is proper retirement age or lack of successor heirs. Unless the owner takes several years of preparation, chances are the business will not be in pristine condition to sell.
Solution: Having audited financial statements for several years in advance of the company being sold is worth all the extra money, and then some, compared to an accountant’s compilations and reviews. Buyers are suspicious of statements that are not audited… as they should be! Buying out minority stockholders, cleaning up the balance sheet, settling outstanding law suits and sprucing up the factory housekeeping are all important. If the business is a “one-man-band,” then building management infrastructure will give the company value and credibility.
5. Not Anticipating the Buyer’s Request
A buyer usually has to obtain bank financing to complete the transaction. Therefore, he needs appraisals on the property, machinery and equipment, as well as other assets. If the owner is selling real estate then an environmental study is necessary. If a seller has been properly advised, he will realize that closing costs will amount to 5-7% of the purchase price; i.e., $250,000-$350,000 for a $5 million transaction. These costs are well worth the expense, because the seller is more apt to receive a higher price if he can provide the buyer with all the necessary information to do a deal.
Solution: The owner should have appraisals completed before he tries to sell the business, but if the appraisals are more than two years old, they may have to be updated.
6. Only Negotiate With One Potential Buyer
Leverage comes in various ways. Historically, sellers are able to ratchet the price up when there is more than one buyer in the running. Businessmen are like athletes that become caught up with the excitement of the competition.
Solution: Amongst other things, the role of the seller’s intermediary is to create a competitive situation with buyers either informally or by use of an auction. The seller needs to have a third party (intermediary) to orchestrate this process.
7. Seller Wants to Retire After Business is Sold
It is a natural feeling for the burnt-out owner to take his cash and run. However, buyers are very concerned with the integration process after the sale is completed, and whether the customer and vendor relationships are going to be easily transferable.
Solution: If the CEO/owner were to become the chairman for one year after the company is sold, the chances are that the buyer would feel a lot more secure that the all-important integration would be smoother and the various relationships would be successfully transferable.
8. Inflexibility in Structuring the Transaction
Many deals crater because the owner wants all cash at closing, will not accept any contingent payments or will not accept an asset transaction.
Solution: A strong team of advisors who are experienced in successfully completing transactions will be able to determine the net after tax difference between various offers, or the present value equivalent, or the risk/reward factor of contingent non-secured payments.
9. Negotiate Every Item
Being boss of one’s own company for the past ten to twenty years will accustom one to having his own way… just about all the time. The potential buyer probably will have the same experience of getting his own way.
Solution: Decide ahead of the negotiation what are the very important items and which ones are not critical. In the ensuing negotiating process, the owner will have a better chance to “horse trade” knowing the negotiating and non-negotiating items.
10. Too Much Time Allocated for Selling Process
Owners are often told that it will take six to twelve months to sell a company from the very beginning to the very end. For the up-front phase, when the seller must strategize, set a range of values, and identify potential buyers, etc., it is all right to take one’s time. It is also acceptable for the buyer to take two or three months to close the deal after the Letter of Intent is signed by both parties. What is not acceptable is the phase during which the company is “put in play”, (the time between identifying buyers, visiting the plant and negotiating,) to take more than three months. Otherwise, if the deal drags it is unlikely to close. The pressure on the owner becomes emotionally exhausting and he tires of the process quickly.
Solution: Again, the seller needs to have a professional orchestrate the process to keep the potential buyers on a time schedule, and move the bids along so the momentum is not lost. The merger and acquisition advisor or intermediary plays the role of coach, and the player (seller) either wins or loses the game depending on how well those two work together.