Braun Jones
By Braun Jones, Partner, WWC Capital Group, LLC
Most middle-market business owners work very hard for many years to build value in their business hoping to one day cash in and realize the fruits of their labor and risk-taking. Although some companies go public, are merged, or are liquidated, a successful “exit event” typically comes in the form of a “simple” sale of the company to one of two types of buyers: a strategic buyer (i.e., a corporate entity with a strategic interest in acquiring) or a financial buyer (i.e., an investment fund managed by professionals with the incentive to make a return on investment).
However, is selling a business ever really that simple?
No matter what type of buyer it is, a financial or strategic, there are some common mistakes business owners make that can prevent maximizing the complete success of a desired outcome. Although business owners are generally expert in operating their own companies, the world of mergers and acquisitions is highly complex – full of tricks, twists, and traps – and new to many entrepreneurs.
To best navigate treacherous M&A waters, certain experience and expertise is required in multiple disciplines including finance, valuation, legal, taxation, accounting, project management, negotiation, and marketing, as well as a broad working knowledge of market dynamics, competitive landscape, and industry contacts. Without a firm grasp of all of these essential components, costly mistakes may be made that can reduce consideration, complicate terms unnecessarily, or even kill deals completely.
Out of the many dozens of M&A transactions I have been involved with and countless war stories I have heard from my peers, the following list comprises the most common M&A mistakes business sellers make.
- Overestimating or underestimating value: Before selling a business, it is imperative to set expectations properly by gaining an understanding of a reasonable and realistic range of value the market is likely to support.
- Selling at the peak or end of a cycle: As with owning stocks, it is human nature to want to keep a business when it is performing well and sell it when it is doing poorly. To get the highest value, business owners need to convince themselves to sell when the business is performing at its best and its future prospects are brightest.
- Failing to plan for taxes and estate: Business owners need to prepare and execute a detailed personal financial plan well in advance of selling a business. Strategies can be established early on that can minimize the impact of or defer taxes that can yield millions of dollars of savings.
- Focusing on price and not terms: M&A deals are typically complex with dozens of negotiable terms that can have a material impact on outcome. Although valuation and price are very important, deal structure and other terms should receive equal attention and scrutiny.
- Failing to take a buyer’s perspective: As with any negotiation, it is often important to understand what the other party really wants. By gaining this knowledge, one can often negotiate a better deal for themselves by determining what is most valuable to give and easiest to take.
- Failing to lock in key personnel: Most buyers will want some assurances that key employees will be sticking around long after the sale is completed. Make sure key employees are incentivized and willing to stay around for at least a couple years.
- Keeping poor accounting and corporate records: Well organized accounting (typically audited financials) and corporate records are required to get the best deal. If the books are messy and inaccurate, due diligence will be much more exhaustive and the deal may even get killed.
- Failing to seek professional assistance: Getting professional help from lawyers, accountants, estate and tax planning professionals, investment bankers, and valuation pros typically more than pays for itself in the long run.
- Underestimating the required time and complexity of issues: M&A deals are complex and time consuming. Business owners who try to do it themselves will often miss important or even critical details. In addition, business owners must be careful to not lose focus on business performance during this critical period.
- Covering up problems that may come back to bite: Most problems are discovered in due diligence so it is important to make them known up-front. Not doing so can create distrust and likely will result in changing price and deal terms once discovered.
Do you agree that these are the top 10 mistakes that business sellers typically make? Please comment and add your thoughts.
