Business owners selling their company often make serious missteps along the way that can result in less cash from sale, if the deal gets closed at all.
Selling successfully requires extensive advance preparation and strategizing to ensure the company shines brightly when it is shown to the marketplace. Moreover, finding the right universe of potential buyers can be essential to producing not only the highest valuation, but also the best fit for the company and the employees. The investment bankers at Doeren Mayhew Capital Advisors share some of the most expensive seller mistakes to avoid.
Failing to Use an Experienced Intermediary
Owners who made ill-fated attempts to sell their own business often confess they wish they had used an experienced intermediary. Without professional help from advisors who understand the value drivers of the particular business, the industry temperature, and domestic and international M&A market conditions, sellers may shortchange the company’s value or mistime the market. Even more importantly, engaging in discussions with the appropriate universe of buyers is a key step in the process.
Instead, sellers often take advice from a golfing buddy who sold his business or an attorney. While helpful, these folks are not experienced in selling a business, understanding the marketplace nor deriving full value for the company.
Under- or Over-Estimating Company Value
Sellers rarely have an idea of what the market might bear, or might overly rely on an old business valuation, typically resulting in an unrealistically low or high value expectation.
Buyers tend to value current performance (most recent 12 months) while sellers tend to value future growth opportunities. Understanding buyer synergies is often the key ingredient to successfully building value in the sale.
Before sharing financial information, it is imperative to normalize your company’s earnings. Eliminating discretionary, nonrecurring and unusual items will serve to increase the annual free cash flow of the business and increase your business value. For strategic buyers, consider also pricing in synergies from the business combination when first presenting company financial statements. Identifying and quantifying the synergies might take some time, but it can be well worth the exercise!
A common devaluation tactic from buyers surrounds customer diversification or, more specifically, lack thereof. Monitoring customer concentration and actively managing customer diversification will serve to protect your valuation.
Misunderstanding Buyer Motivation
Financial and strategic buyers typically do not share the same mission. Financial buyers tend to look more for short-term returns prior to re-selling the company. On the other hand, strategic buyers, while also enjoying short-term returns, tend to have a longer-term horizon to generate return on investment.
Strategic or financial, understanding the buyer’s motivation is key to deriving maximum value for the business. For example, a Danish buyer looking to put its flag in the energy capital of the world in Houston might simply value that opportunity more than a strategic buyer already established in the United States, or Houston. A private equity firm (PEG) with a new portfolio company in the sector would be willing to pay more for the add-on acquisition than a PEG with no industry experience.
Mentioning Price First
What is your asking price? Commonly posed by buyers, be sure to never answer this question. At the end of the day, the market will tell us what the company is worth. Running an effective marketing process will produce the highest price, whatever that might be.
Forgetting to Plan Post-Sale Future
Many business owners neglect to plan for their exit from the business. How will the business operate with the owner/CEO no longer making the day-to-day decisions and effectively motivating and managing the team? Has a replacement been trained and is he or she ready to take the reins?
Buyers always hone into this detail and require the owner to stick around for several years to protect the company value if a replacement is not in place. Otherwise, the buyer will discount the company’s value.
Locking up a key general manager or salesperson can also drive value, since they helped generate the free cash flow. Moreover, the continued employment of these key folks will reduce buyer risk, and protect your valuation.
Careful Deliberation
These pitfalls and costly mistakes can easily be avoided with the right planning. Unsolicited buyer inquiries are reasonable and appropriate, but must be handled the right way from the front end. Successfully planning for your exit requires several key considerations, including retaining the right investment banking experts. Contact Doeren Mayhew Capital Advisors to help you effectively navigate the path.
