I have illustrated from time to time why sellers make certain choices as to when and how they pursue the sale of their businesses. Here I will group the common scenarios to avoid.
A Must Sell Situation
Selling on strength should be your goal but be mindful that the selling window can close anytime. If you are in a must-sell situation it is critical not convey this urgency and to leave potential buyers with the impression that time and options are on your side.
Not Managing the Process in a Timely Manner
If a buyer feels that the business has been for sale for a long time he/she may conclude that there are no other interested buyers and the auction aspect will be lost resulting in a low bid.
Critical Reliance on the Seller
Before a sale an owner-entrepreneur responsibilities and relationships should be migrated to a management team that will stay with the business; otherwise he or she will have to remain for an extended transition period.
Restricting the Buyer Universe
For an owner entrepreneur to not want to approach a key competitor is fine but to restrict the potential buyers to two or three possible buyers can be a critical mistake. In “Finding a Buyer: It is Rarely the One You Expect” I outline the numerous reasons why a potential buyer will not be the actual buyer.
Unrealistic Price Expectations
The seller and M&A advisor should understand and agree on fair value before the selling process begins. Once the process begins it becomes about soliciting strategic buyers, creating that competitive bidding tension and realizing the highest price possible.
Lack of Specificity in the Letter of Intent
Signing the LOI is a turning point in the process where the negotiating power switches from the seller to the buyer; it is the point where you grant exclusivity to the buyer and proceed to full legal documentation. Therefore, a clear and complete LOI can save expensive legal negotiations.
Proceeding With an Unfunded Buyer; No Counter Due Diligence
You are taking a substantial risk when you rely on a buyer that assures you he/she can get financing or that the funding will come from the sale of another asset that is imminent. Due diligence and legal documentation are time consuming and expensive processes that should not be pursued in a contingent environment.
Ignoring the Soft Factors: Can You Work With These Folks?
When an earn-out is in play that will see the buyer and seller working together for a substantial period of time, the seller needs to examine if the prospective working relationship will support the ability to achieve the earn-out.
Neglecting Day-to-Day Operations
The selling process can be extremely time-consuming for the seller and a transaction is not done until all of the documents are signed and the cash is in the bank. If the seller is also responsible for business development, the M&A process can be distracting to the point of affecting the business’s operating performance.
No Plan B
One of the M&A advisors responsibilities is to provide options and to keep options at hand until closing. Without a workable plan B, a process can die simply from exhaustion.
Overly Aggressive Seller Forecasts
The selling process is one that takes seven to ten months to complete and therefore you will always run into the question of: “are you on track”.. “can we have a look at the latest quarterly numbers?” To underperform at this point is a worst case scenario.
Engaging the First Unsolicited Offer
Don’t feel that you have to engage a major supplier or customer when they make an unsolicited offer. If potential buyers use pressure tactics to force a transaction it may be best to bring in a third party intermediary to manage the relationship and introduce other potential buyers.
There are many scenarios to avoid when selling your business. An experienced M&A advisor will manage the process in a diligent, thorough and timely manner to avoid the pitfalls and realize optimal value.