Let’s get right to the point. Top 10 lists are fun, especially when you have the wit and studio audience that Dave Letterman had. Well I do not have either, but I will try to run with this well established concept for my blog, this time within the framework of a business sale. I appreciate that it might be rather cavalier for me to volunteer a few succinct bullet points about the prudent steps to take in a sale process, and expect to have encapsulated every aspect that is imperative for a business owner to consider.
That being said, my goal is rather to reinforce general ‘best practices’ as you give thought to one day engaging in the process of a business transition.
While I would much rather frame a business discussion in a constructive light, I am going against my grain and will position our list as a “what not to do” series of pitfalls. Before going further, I must insert this disclaimer as blogger indemnification: failing to avoid these ten pitfalls does not doom a sale to failure. But if addressed proactively, in our experience as an investment bankers, you significantly enhance the likelihood of achieving your desired outcome.
Ok, without further ado, here are our 10 Pitfalls to Avoid:
10. Failure to do pre-sale or transition planning
This harkens back to my previous blog post focused exclusively on pre-transaction planning (See: Pre-Transaction Planning: Take Time to Sharpen Your Axe). Much like getting out to train for a road race, you need to condition your enterprise for the rigors of a sale process, which can extend beyond six to eight months depending on the circumstances. Steps in this important, but all too often ignored phase, include the following: personal and estate planning, due diligence audits, corporate governance review and internal accounting clean-up. This is also where you would establish reasonable price expectations that have been grounded and informed by a valuation analysis. By taking a multi-pronged approach to appraising the worth of your business (through the asset, income, and market approaches to valuation), you can head off future heartburn and unproductive emotional reactions to pricing gaps between you and the buyer. Taking the time to model out and value your business also helps a business owner better defend and articulate your company’s value proposition as negotiations progress.
9. Mistiming your window
While you might be mentally ready to start painting in water color on the back veranda and your company is performing well, the real issue is whether your industry is ready and receptive for your business. If sentiment has turned and the buyer marketplace is dormant, you are not well positioned to maximize value. It is vital to be out in front of the prevailing conditions in your sector to understand the natural ebb and flow of your industry. To summarize this point, I again reference Mr. Letterman who once stated “Next in importance to having a good aim is to recognize when to pull the trigger.”
8. Taking the first offer that crosses transom
Fairly straight forward concept, but nonetheless it is hard to suppress the excitement that comes from receiving an offer. While sometimes a closed negotiation is the preferred and comfortable route with a known buyer, the laws of supply and demand are at play here. Developing an atmosphere of controlled competition is typically advantageous from a value perspective.
7. Going it alone
Being a lone wolf can certainly work, but you are introducing more risk as a tradeoff for reducing cost. Despite being in a dialogue to sell, you still need to run your business and run it well. Deteriorating performance while in the midst of a negotiation is not a good look, so we strongly advise our clients to form a deal team that should consist of key members of your management team, your attorney (ideally one with M&A experience), your CPA, your investment advisor/estate & financial planner, and your investment banker. Remember: buyers are well researched and most likely have dedicated teams and processes in place, so not having the proper support structure in place on the sell side can compromise the full value you are seeking.
6. Taking the highest offer without the consideration of culture or legacy
Very simply, your company tends to be a reflection of you as a person. You’ve provided the leadership while forging its culture and core values. It can be hard to see your imprints changed, especially when they are contrary to your established vision. Being aware of these “softer” or “social” concerns in a transaction really is important.
5. Failure to negotiate the details
The point here is that the deal doesn’t stop at the letter of intent (LOI). Yes, the devil is in the details and you want to have a clear and precise understanding of how value is transferred. Make time to thoughtfully negotiate both deal price and deal structure.
4. Failure to control the process
Having command of the whole sale process, from valuation through closing, is obviously critical. But, in this context, we are specifically drilling down to the time frame that comes after the initial LOI. It is paramount to navigate the time in between the LOI and the closing as expeditiously as possible. As suggested in the aforementioned pre-transaction blog, time is not your friend in the process, so being able to firmly hit milestones helps to de-risk the transaction.
3. Sparing the bad news
Transparency is what needs to take place in a sale, plain and simple. We strongly advocate full disclosure early on in the sale process. Surprises to a buyer are one of the quicker ways to undermine confidence and crater a deal (not to mention the fact that being upfront is just the way good business should be done).
2. Information leaks
To accomplish a successful transition, you will need to enlist the help and service of your key employees. The hard question that people often wrangle with is when? At what point do you bring certain team members under the tent? How do you ensure confidentiality is maintained? Communication, both with the buyer and internally, is a critically important dynamic and one that should be handled carefully. Much of this comes down to trust, your relationships, and how you’ve chosen to incentivize your key people. But that being said, it would be wise to invest the time to closely manage the confidentiality issue.
1. Underestimating seller risk (especially when transferring to insiders)
What it is meant by seller risk is essentially the dynamics of a seller-financed transaction, whereby the owner takes paper for a portion of the consideration owed to them in the sale of their business. By financing a portion of the value, you are essentially tying yourself to your business for an additional period of time. As such, you need to evaluate the ‘new owner’ of your business as if you were making an investment in them. Can they perform on their plan? Can they service the debt owed to you? Can they repay principal under the defined term? You might be able to realize some additional benefit from earning interest income on the paper that you provided, but you do want to clearly evaluate the likelihood of being made whole versus having to work out a bad loan.
Chief Operating Officer
About the author: Peter is the Chief Operating Officer of BaldwinClarke and a Senior Associate with BaldwinClarke’s investment banking practice. Peter spent over 10 years as a financial analyst in the private equity industry space before joining BaldwinClarke to further support the firm’s capabilities working with entrepreneurial clients.