12 Mistakes to Avoid When Selling Your Private Business
The following illustrates 12 scenarios to avoid when selling your business and discusses the main impediments to securing exceptional value for small private companies.
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.
Impediments to securing exceptional value for a small private business
There are many scenarios to avoid when selling your business but what are the main impediments to securing exceptional value for small private companies?
Many owner-entrepreneurs develop expectations for their business’ value based on news items and industry chatter about M&A and financing activity. However, the small percentage of transactions that make the headlines are not reflective of the average transaction. The factors we see most often (not in order of frequency or importance) that prevent private mid-market companies from achieving a premium valuation include:
Small Size: Most transactions in the news concern multi-billion companies. While we have seen one in a million start-ups fetch billion dollar valuations, most small companies are discounted to larger companies because of their riskier operating profile and because there is less liquidity in the lower end of the M&A market. Companies valued at less than $10M will not find as much interest as larger companies.
Customer Concentration: The issue of customer concentration varies by industry and by business model. In the automotive sector, if you are a supplier to Ford, GM, Chrysler, VW, Honda and Toyota; six clients, then you are in a good position. Generally, for B2B companies one would like to see at least 20 clients and if your business is a cloud based consumer or SMB focused business than 100 or even a 1000 clients will be seen as small. Ultimately, it is not the total number of customers that is the measure of risk but the exposure to any particular customer. Ideally no customer generates more than 10% of revenues.
Modest Growth Rate: Growth needs to be measured over an appropriate period and in the context of the economy and peers. While a single digit growth is respectable for a mature business, in many sectors it needs to be double digit to warrant a premium valuation.
Principal Goodwill: Principal goodwill is the value of the knowledge and relationships that the Principal holds. Large companies have documented relationships, usually multiple points of contact and formal processes for dealing with change. This reduces risk and improves value.
Lack of Business Model Focus: The challenge with a business pursuing various services and segments at the same time is that it reduces the buyer universe. As an example, take a business that starts out as a IT services/consulting business and then develops a SaaS based service. It gets some traction and now the revenue mix is 60% consulting and 40% recurring SaaS revenues.
We would market this business as having recurring revenues but to pure SaaS companies this would dilute them. Certain consulting businesses won’t have the appetite or capital on hand to invest in the marketing that the SaaS business needs. Lack of focus in the business model will reduce buyer interest and hence value.
So, what does produce a headline grabbing valuation? Simply put, you have to be viewed as being on a path to achieve a leading position in a new segment that is expected to be enormous.
Recommended Further Reading
For other value impediment considerations, see: Business Goodwill Transferability is Critical for a Successful Business Sale
For more on how long an acquisition takes, see: How Long Does it Take to Sell a Business?