Selling a business is something that most business owners will only attempt once in their career. With an estimated 70% – 90% of their total net worth tied up in their business, they can’t afford to make a costly mistake, but their success in running their own business generally doesn’t prepare them to handle one of the largest and most crucial financial transaction in their life.
This is the second in a series of articles exploring some of the common pitfalls in selling a business.
Major Pitfall No. 3 – Time Kills All Deals
There is probably no greater truth in all business mergers, acquisitions, and sales – for buyers, sellers and M&A advisors alike – than “Time Kills All Deals.”
In my experience, no other factor has caused more potentially good deals to go bad than letting the sales process between two parties drag on and on until it eventually grinds to a halt.
While M&A advisors play a large role in leading/setting the pace of negotiations, due diligence and pre-closing preparations, all parties share responsibility for ensuring that they – and their advisors – come to the discussions fully prepared and poised to give this matter their full attention and priority.
Whether you’re a buyer or a seller, your M&A advisor should provide you with a checklist of the Things You’ll Need To Get Started, as well as a much more detailed checklist of Things You’ll Need to Complete Due Diligence.
Some tips to keep you out in front of the process:
- Prepare a Confidential Information Memorandum, including all of the basic information on the company and update it regularly.
- Begin assembling the documents that will be requested in due diligence in advance, such as, tax returns, financial statements, corporate record books, leases, contracts, insurance policies, employment agreements, employee benefit plans, policy manuals, occupational licenses, business licenses, etc., and keep copies in a central location, or virtual data room so they can be easily copied/examined.
- Contact legal, financial, & accounting advisors to let them know what’s going on and that you’re counting on their full and timely support.
- Stay focused on your primary goal which should be: Getting the deal done, and make certain that all parties keep their egos in check
Major Pitfall No. 4 – Allowing Emotion to Overrule Reason
By the time most owners come to sell, they’ve invested most of their working life in building the business to its present size and profitability. In addition to their considerable investment of time and money, they understandably have a tremendous psychic and emotion investment as well. Many owners, and especially founding owners, tend not to respond well to questions about why things are done a certain way, or suggestions on ways the business might be further improved, or observations that the business may have certain systemic weaknesses even while acknowledging that it has many strengths.
Because selling a business can be emotionally gut-wrenching and that emotion can spill over into irrational reactions to prospective buyers in the sales process and potentially damage or even derail an otherwise successful sale, a principal role of the M&A intermediary, is to keep the process and the discussion as objective and rational as possible.
Determining the fair market value is one issue sellers commonly have difficulty with. They are inclined to associate value with the years they put into the business, the investment they made in plant and equipment, and how much it would cost to replace it all, rather than from the perspective of what level of investment /acquisition price will the business support today with its current and projected profit and cash flow and still give the investor/buyer a fair return on his investment.
The successful sale of a business requires a carefully planned approach in which each step is done right. While owners are experts at successfully running their own organization, few are equipped to navigate this complex process and, therefore, they are at a distinct disadvantage. The use of professional advisors who can provide the expertise, support and representation required to sell a business for the best price and terms will typically more than pay for itself.
If you know of a business owner who’s thinking of selling or buying a business and who might benefit from a free consultation with us, have them contact me in strictest confidence at firstname.lastname@example.org
Mike Ertel, CBI, M&AMI, CM&AA
Transworld M&A Advisors
©2020 J Michael Ertel, PA