In the News
Common Mistakes to Avoid
When Selling Your Business - Part 2
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.
This article is part two 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.
- Running the business as if you have one foot out the door
Some business owners revert to operating their business in a defensive mode when they are in the process of selling their business. They stop taking the risks that led to their success and stop investing in their company. The process of selling a company can take a long time and even the most encouraging offers can fall through.
- Not knowing the value of your business
Many business owners value their business on their gut instinct rather than on how the market perceives the value of the business. They focus on what they have done to build the business and their vision for the future. These emotions often lead to many false starts
during the sales process.
- Failure to put the appropriate "Deal Team" together
A top tennis player like Roger Federer doesn't prepare for a tennis tournament alone; he has a coach, trainer, agent and a nutritionist on his team. Likewise, a Seller should not go about selling their business without the proper "Deal Team" in place. If you are considering selling to a Private Equity Group, remember that this is what they do for a living. If you are looking to sell to a Strategic Buyer, chances are that you will be dealing with seasoned executives that have acquired other companies before. Thus, most Buyers are sophisticated professionals who have significant experience buying companies. To transact at this level you need the proper "Deal Team" in place. You need 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. You should have an attorney that specializes in mergers and acquisitions as they will have expertise in the legal issues involved with M & A transactions and best protect your interests. Your Deal Team should also include a CPA that has the tax expertise to advise you on the tax implications of the transaction structure. Be like Roger Federer, assemble the best Deal Team possible to ensure optimal results in the sale of your company.
- Selling the business at the wrong time
If you end up selling your business when you "have to sell", you are doing yourself a great injustice. Some business owners end up selling when revenue is declining, when they are completely burned out, have a health issue or have to split with a partner. Selling your business under duress typically leads to a lower selling price.
- Failing to present "Pro-forma" financial statements
Sellers that fail to prepare Pro-forma financial statements that make their business look more favorable and valuable are ignoring an important practice in the M & A process.
- Supplying poor or unreliable information
Potential Buyers expect to see accurate and appropriate information about your business. Inability to provide this information provides the Buyer with additional risks which they will look to mitigate by lowering their purchase price, modifying the structure of the transaction or by walking away from the transaction.
- Not having a good reason as to why you are selling the business
One of the first questions a potential Buyer will ask is, "why you want to sell your business". If the Buyer is not comfortable with your answer they can get spooked and walk away from further discussion.
- Failing to address transition issues
Some Buyers do not want the Seller to continue on after the closing of a transaction while others require the Seller to stay on to ensure a smooth transition. An unsatisfactory understanding with respect to transition can cause discontent and ultimately lower revenue which can result in a reduced Earn-Out to the Seller.
- Taking a Hands-Off approach during sales process
Some Sellers believe that once they retain an Investment Banker to sell their business their work is finished and they can remove themselves from the sales process. This cannot be further from the truth. Sellers have the most comprehensive knowledge of the company and their communications with the Buyer can have an effect on how the Buyer views the company.
- Concentrating only on price
Focusing solely on price can lead to selection of the wrong Buyer. Many factors should be taken into account such as the financial strength and reputation of the Buyer, transaction structure, timing and the ability of the Buyer to close the transaction.
- Failure to ignore feedback
A Seller will receive various feedback from the market. Ignoring this feedback affects your ability to make positive changes to improve how your company looks to a potential Buyer.
- Your business has customer concentration issues
If your business is too dependent upon just a few customers it poses significant risks to a potential buyer. This may affect the purchase price or require you to hold a significant amount of Seller Notes or receive an Earn-Out over a very long period of time. It is to your advantage to diversify your customer base as much as possible.
- Failing to understand the tax effect of a prospective transaction
Too many sellers focus on the gross selling price rather than the amount they will net after taxes. They fail to consult with their CPA with respect to structuring of the transaction.
- Failing to provide information on a timely basis
Potential Buyers will request historical financial information regarding profitability, customer and product line sales, obsolete inventory, past due receivables, detail of fixed assets as well as other detailed information. Inability to supply this information on a timely basis will spook the potential Buyer.
Selling a business is a specialized, complex and time consuming process. 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.
These mistakes can easily be avoided with the guidance of professionals who have significant experience in the process of selling companies.
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