Selling your business is a once in a lifetime decision. However, when it comes to maximizing the value of a business in a sale, there is little margin for error and oftentimes, mistakes are made that can have significant implications on the outcome. It is possible to reduce the likelihood of an unsuccessful outcome by avoiding common missteps that are often made before and during the sale process. We’ve outlined six mistakes business owners commonly make when selling their private companies.
1. Having an insufficient management succession plan
For owners seeking a full exit from the business, having a succession plan is critical to a sale process, particularly if the owner is vital to the success of the business. Those who wait to sell until they are ready to exit and don’t have a succession plan in place are often disappointed when asked to continue working after the transaction has closed, which could be a short-term obligation (less than one year) or a lengthier one (3-5 years). Business owners can avoid this by having a successor and/or a robust management team that can continue operating the business in the owner’s absence prior to approaching the market.
2. Going it alone without professional advisors
Investment bankers, attorneys, and other advisors can be expensive, however, the repercussions of executing a transaction without the proper guidance can be more damaging and end up costing the seller multiples of what the advisors would have been. Hiring an experienced investment banker is critical because they understand the nuances of the market and can run a process tailored to the company’s needs. Likewise, having an attorney with considerable M&A and industry experience (who might be different from the company’s existing corporate counsel) can be a differentiator. The right advisors will bring perspective, anticipate outcomes and stay focused on protective and mitigating strategies that will not only maximize shareholder value but preserve cash proceeds beyond the transaction closing.
3. Becoming enamored with the prospect of a one-off sale
Many business owners receive unsolicited offers at one time or another, which isn’t unusual given that buyers are often looking for proprietary deals. However, singling out one buyer is a common mistake as they might not be the “best” buyer for the business, and even if they are the ultimate buyer, the absence of a competitive process likely won’t result in maximum value for the seller. These types of arrangements tend to include a significant time investment for the company’s management team, while also exposing the business’s private information to an outsider. In the end, deals approached in this manner often fall apart or the buyer takes advantage of the seller’s lack of options and completes a “sweetheart” deal (for the buyer).
4. Avoiding talking to the “best” buyers due to confidentiality concerns
When an owner decides to sell his/her business, the goal is typically to maximize the valuation. The buyers that are most likely to pay top dollar are those that are already in the seller’s industry. In fact, they are probably competitors. Many business owners have difficulty with the idea of selling their business to a competitor for a variety of reasons and, as a result, they end up running a process that excludes the top prospective buyers. Avoiding these prospects can result in a reduced valuation and/or the potential risk of not finding a buyer altogether. If a seller wants to maximize the likelihood of a premium valuation and successful closing, he/she needs to strongly consider approaching the best buyers while employing an approach that mitigates confidentiality and/or competitive risks.
5. Going to market unprepared
Selling a business takes time. It isn’t unusual for a sale process to last six months or longer. An imperative aspect of the process is being prepared. Knowing and anticipating what buyers will expect to see three months, as well as five months into the process is critical and the seller should be prepared with that information prior to starting the process. This preparation is substantial and can include hiring an accounting firm to conduct a quality of earnings analysis, undertaking a thorough underwriting of the company’s projections, conducting a legal review of contracts and other agreements, organizing and fully populating a data room and many other factors that will come into play during the sale. Taking these steps before the process begins will better prepare the management team, result in a more efficient process and will help the seller maintain leverage with the buyers, all of which ultimately will lead to a higher valuation for the seller.
6. Having an unrealistic or misaligned view on valuation
Oftentimes, business owners overestimate the value of their business and go to market with unrealistically high expectations, which is a recipe for disaster. When there is misalignment around valuation relative to what the market will bear, the likelihood of a successful closing is greatly diminished. Additionally, given that the sale process is time-consuming, intrusive and distracting for the management team, unrealistic expectations can be very damaging to the company in the long-term if a deal is not consummated. It is important for sellers to be aligned with their advisors on valuation (and for the advisors to be forthcoming about what is realistic). If this alignment does not exist, then the seller should seriously reconsider the sale process or accept the risk that comes with having unrealistic expectations with regard to value.