Top 10 Pitfalls When Selling a Business Domenic Rinaldi 1 If Only You Knew…. You wake up one day and decide this is the day you’re going to find an M&A Advisor and get this business sold. During an initial consult it’s revealed that the you have done about 20% to 40% of what’s necessary to successfully exit the business. This scenario plays out every day. In fact, the statistics are that fewer than 25% of privately held business owners prepare for an eventual exit. The time to start preparing is well in advance of an exit. This will give you the time to maximize your return. Also, the exit may come at a date not of your choosing! 2 2 To Go it Alone or Not to Go it Alone Oftentimes I see that owner’s don’t surround themselves with the proper set of advisors or they wait until they are too far along in the process. Not having advisors that specialize in mergers and acquisitions is a colossal mistake and can result in a suboptimal outcome. The right set of advisors will help you maximize value, minimize risks and enhance your net proceeds. Identify the M&A Advisory team that can advise you EVERY step of the way so you avoid the countless pitfalls in a transaction! 3 3 Personal Readiness Do you know your walk away number? Do you have enough assets pre-transaction? If not, what do you need from the sale to fund your next phase? Is your estate in order and set up to minimize estate taxes? These are all questions that should be asked and answered well in advance of any potential exit. In some instances, this phase could take years to accomplish – especially if you don’t have the assets necessary to exit. Identify the proper group of advisors for your personal situation so you can build out various scenarios and have your plan well documented! 4 4 Know What Drives Value…from Day 1 More often than not an owner has a value identified based on the future potential of the business or how much sweat equity has gone into building the business. These are not the value metrics that buyers and lenders use to ascribe value to a business. Buyers are interested in a business because of the future potential, however they are only willing to pay for the current performance of that business. Additionally, banks are only going to lend on the current situation. There are a set of value drivers for every business and understanding those elements and how they increase or decrease value is imperative to maximizing your ROI! 5 5 Are You Truly Leading? As the owner, you have most likely spent time in all the functional areas of the business, especially early on if you started the business, to ensure operations ran smoothly. Most, if not all, strategic and operational decisions are made by you. All the clients and vendors know you personally and this has helped you build the business. This is great early on but being such an integral part of the business will decrease the value of your business and make it hard to sell. The more you can eliminate yourself from the operation of the business the higher the value. The buyer risk increases the more you do in the business! 6 6 Ouija Board Pricing You’ve worked hard and deserve to maximize the value of your business. But just because you worked hard and sacrificed, does not mean your business will garner a premium. Your hard work does not translate to value unless you have honed your value drivers. And the strategy of throwing your business on the market at an inflated price could ultimately harm your business. Once people start to learn a business is for sale, you risk a breach of confidentiality. There is a value range for every business and it is acceptable to price at the high end of reasonable. But pricing above reasonable can be very detrimental! 7 7 Magnitude of a Confidentiality Breach There’s a natural tendency by most owners to share their desire to exit with their long time employees and vendors. These are people that were important to the growth of the business and you feel they deserve to know. The problem with this strategy is all these stakeholders will have questions - questions you can’t answer. When you can’t answer their questions, they will get nervous and look for new jobs, tighten credit, tell other people, etc. The potential sale of a business is a long and winding road. The best practice is to tell people the day you sell the business or your business can face serious risks! 8 8 Sit Back and Let it Happen You finally decide to move forward with the sale of the business – this is a huge weight lifted off of your shoulders. You’ve hired a great advisory team and the sale is in good hands. You’re in the home stretch after a long career and start counting the days to closing! Many owners fall into this trap only to realize the process is long and because they took their foot off the pedal the business starts to falter. This scenario can result in a significant lose in value, or worse, the termination of your transaction. The day you decide to sell is the exact time to make sure the business is running on all cylinders. Don’t make big bets but keep this business in top form! 9 9 Focus Only on Purchase Price It’s so easy to be focused on the Purchase Price that you lose sight of the net proceeds. Net proceeds is the amount of money you ultimately walk away with after all fees and taxes. In fact, the highest purchase price offer doesn’t always mean you are maximizing your net proceeds. The deal structure, terms and conditions are just as important as the purchase price and understanding this before you sign an offer is critical. The time to work on your net proceeds is well in advance of bringing your business to market. This exercise takes a coordinated approach with important assumptions! 10 10 What’s Next? There are some studies that report over 75% of business owners are remorseful about selling their businesses. Interestingly, for many of these owners the purchase price and net proceeds met or exceeded their expectations. The element that was missing...they had no life plan for the day after the sale. This can be devastating for many people. After a career of relevancy, they find themselves with no place to go and no life plan. Just as you should be building a comprehensive plan to maximize the sale of your business, you should also be building a plan for a happy and successful post sale life! 11 Sun Acquisitions has developed a fully integrated process that helps our clients evaluate all of their selling and buying options. We understand the importance of having your business and transaction handled by experts. Our certified M&A advisors are all experts in M&A transactions and know how to help our clients achieve their desired outcome. Since 2005, Domenic has been personally involved in over 300 M&A transactions for businesses with enterprise values of $2 million to $50 million. Domenic has also educated thousands of owners and buyers on their contemplated transactions. Domenic’s an industry-recognized expert who frequently shares his hard-earned knowledge from the stage, in print and over the airwaves – including as host of the popular M&A Unplugged podcast. 12
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