By Neil Seiden, Managing Director, Asset Enhancement Solutions, LLC
This is the second in a series of articles regarding Mergers & Acquisitions in the Middle Market. Asset Enhancement Solutions, LLC is committed to educating business owners and their trusted advisors on this topic as well as other pertinent issues that affect Middle Market companies.
A "mistake" is defined as:
- A wrong action attributable to bad judgment, or ignorance or inattention
- An understanding of something that is not correct
- To misunderstand, misapprehend, or misconceive
- To take or choose wrongly
- To err in knowledge, perception, opinion, or judgment
- To commit an unintentional error
In life, learning from one's mistakes and the related trial and error develops good judgement and creates wisdom. However, when it comes to selling your business, you cannot afford to make mistakes as it could be a once in a lifetime event involving the majority of your net worth and you may not get a second chance.
Selling a business is a specialized, complex and time consuming process. This article is part one of a two part series that discusses the common mistakes made by business owners when selling their business. These mistakes can easily be avoided with the guidance of professionals who have significant experience in the process of selling companies.
- Insufficient preparation
The biggest mistake that Sellers make is not properly preparing for the sale of their business. Some Sellers begin thinking about selling their business only a few months before they are ready to retire. These Sellers have no idea what is involved and enormously underestimate the amount of time and effort that is involved in a successful sales process. Professionals involved in the sale of companies estimate that it could take up to two years for a company to be ready for the sales process. During this period the Seller should be focusing on matters that affect both the selling price and salability of their company.
- Your asking price is wrong
You do not want to ask for too much or too little. If you ask for too, much you may chase away prospective buyers, if you ask for too little, you may be leaving too much on the table. Alternatively, should you even have an asking price at all?
- Handling the sale of the business yourself
Successful people know their strengths and weaknesses and that they should surround themselves with people that are smarter than themselves. While you may be excellent at negotiating an employment contract, vendor agreement or customer contract, negotiating the sale of a business is totally different! While some of your success may be attributable to learning from your mistakes, when it comes to selling your business you may not get a second chance. Selling a business is a specialized, complex and time consuming process. Taking your eye off the ball and putting too much time into trying to sell your own business often results in the deterioration of your financial results which will have a negative impact on the price your business sells for. A seller should retain an Investment Banker with the skill and resources to manage the sales process, identify suitable buyers and negotiate in your best interest. While an Investment Banker can be expensive, they most often will pay for themselves by negotiating a higher price that will more than offset their fee. Investment Bankers not only anticipate problems before they arise, they also successfully resolve issues and make sure the transaction gets closed.
- The business is too dependent upon you
If you are the only person that works with and develops key customers and suppliers and the company is unable to operate without you, you will have a significant challenge selling your business. A prospective buyer is seeking to purchase a viable business, not you.
- Ignoring the value of "Hidden Assets"
Sellers often focus on what prospective buyers focus on, multiples of EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). Does the balance sheet contain depreciable assets such as equipment, real estate and intangible assets with values far in excess of their book value? Sometimes the value of these Hidden Assets are not taken into account in the selling price.
- Taking your eye off of running the business
The process of selling a business is extremely time consuming. If you are too focused on selling your business resulting in the deterioration of your financial results, this will have a negative impact on the price you sell your business for.
- Lack of credible financial statements
Companies that need to borrow a significant amount of money or raise equity are typically required to present Reviewed or Audited financial statements from a reputable CPA firm. Should you be fortunate enough to be self-funded you may only have statutory tax returns prepared on an annual basis. A prospective Buyer receives more comfort from Audited financials, but often may accept Reviewed financials. These financial statements must be in accordance with GAAP (Generally Accepted Accounting Principles). The prospective buyer's capital source financing an acquisition may insist on receiving two to three years of Audited or Reviewed financial statements from the Seller in order to finance the transaction. Do not risk jeopardizing a transaction due to the lack of credible financial statements.
- Failing to properly "Recast" operating results
As a privately held company is typically oriented toward minimizing taxes, the financial statements often do not reflect the true profitability and cash flow of the company. A Seller that does not properly Recast their financials is leaving money on the table.
- Antiquated IT systems
A well-functioning enterprise system is often the back-bone of a successful company and the ability for it to grow and prosper. An outdated system could adversely affect the price a Buyer is willing to pay for your company.
- Lack of a strong management team
Some Buyers are seeking businesses with strong management teams that can operate effectively once the owner of the business departs. Lack of a strong management team can reduce the number of Buyers that may have interest in purchasing your business as well as reduce the price a Buyer is willing to pay for your company.
- Lack of proper Confidentiality Agreements
A Buyer will be performing extensive Due Diligence when they are evaluating your business. They will look at your books and records, customer invoices, customer information, vendor information etc. If correct Non-Disclosure Agreements (NDA's) are not in place, potential Buyers/Competitors could use the process to access confidential information about your business.
- Working with only one potential Buyer
Buyers do not limit themselves to looking at only one potential company to purchase. They look any many different companies at the same time. By focusing on only one Buyer, you significantly weaken your negotiating position.
- Failure to control the flow of information to a prospective Buyer
Some Sellers provide too much data information too soon. Data should be released in a controlled fashion, making sure the Buyer's requests are satisfied without providing sensitive material that may be harmful to your business.
- Failure to prequalify prospective Buyers
Sellers are often fearful of qualifying prospective Buyers too early in the sales process as they are afraid this will dissuade potential Buyers. Early qualification may scare away those fishing for sensitive information and safeguard this information from getting into the wrong hands.
- Consideration of only "All-Cash" offers
Unwillingness to entertain deal structures other than "all-cash" can adversely affect the total "net" consideration you receive. Depending upon who the Buyer is, Seller Notes, Buyer Stock, Earn-Outs and other deferred payment structures should be considered.
There are many mistakes that can be made during the process of selling your business. In life we are encouraged to learn from our mistakes. However, when it comes to selling your business, it is best to have a Deal Team who has both seen and learned from these mistakes before. With the proper assistance from skilled professionals you will avoid these mistakes and maximize the transaction value from a well-coordinated sales process.
Asset Enhancement Solutions, LLC ("AES"), is a financial advisory firm that provides both Investment Banking and Consulting Services to companies considering important transactions such as selling a company, acquiring a company and raising capital. AES with its strategic partners consult with business owners on various types of transactions and throughout all phases of the M & A process.
To learn more about how Asset Enhancement Solutions, LLC can assist you with your transaction, please contact:
Neil Seiden, Managing Director
Asset Enhancement Solutions, LLC