Owners Should Avoid These Costly Mistakes When Selling Their Business
Low interest rates and a strong economy make this an ideal time to consider selling a well-established oil and lube business. Acquisitions are one way existing companies grow and investors enter a new market. Avoiding common mistakes and using proven strategies in the sales process can allow private owners to exit their businesses at the right time for the optimal price.
Mistake No. 1: Not Having a PlanMost business owners do not have a formal plan to exit the business, and without a plan, they risk not receiving the real value of the enterprise they have worked so hard to build. Often, they don’t realize there are buyers from the U.S. and around the world who may have an interest in acquiring their company.
No. 2: Not Knowing How to Value the BusinessSome buyers will pay a premium over the economic value (baseline value solely based on earnings) if they value other intangibles such as reputation, location, leases and real estate, specific products or services, technology or the ability to expand or consolidate operations with nearby facilities.
No. 3: Not Recasting EarningsBuyers are paying for your company’s future. The only way to accurately highlight your future profitability is by recasting your historical financials. This can be done by removing one-time expenses, discretionary expenses and non-recurring revenue and expenses. Use accounting professionals to make sure that the items recast are adequately documented and are realistic.
No. 4: Failing to Cast a Wide NetIt is our experience that the best way to approach the market is to cast a wide net. Most sellers believe that a local or regional competitor is the optimal buyer. To maximize the value of a business, it is important to cast a wide net for buyers. That may include private equity firms, strategic players, high net-worth individuals and businesses seeking to expand in a specific market or market segment. M&A specialists have access to proprietary databases as well as extensive business relationships that can tap these often hidden potential buyers.
No. 5: Not Having Your Documents in OrderYou only get one chance to grab and hold a buyer’s attention. If your documentation is spotty or, worse yet, full of errors, chances are good you will lose every interested buyer. Are your account receivables current and in order? What about documentation for financing, leases and software licenses? Clean documentation is vital especially during due diligence. Far too few business owners have prepared for the detailed questions that arise during this final stage of the exit process. Having an idea of how to create a “buyer ready” business is vital long before you reach the due diligence phase.
No. 6: Not Having Key Pre-Sale DocumentsAt a minimum, you will need to prepare three key documents: the confidential business review (CBR) – also called the offering memorandum (OM); a profile letter – also known as the “teaser;” and a rock-solid non-disclosure agreement (NDA). An OM is quite simply the written version of the evaluation process we discussed under mistake No. 1. However, it is more than just your financials (clean financials are vital).
Most importantly, once potential buyers have received your profile letter and have contacted you with interest, you need them to sign an airtight NDA. Be very careful here, and make sure that your NDA is written by an attorney experienced in the M&A field, so you and your firm are protected.
No. 7: Not Structuring the Deal in Your FavorMistakes in structuring a transaction can significantly erode the hard-fought value a seller managed to negotiate. For example, structuring an earn-out or employment agreement can add significant value.
No. 8: Not Selling at the Optimal TimeSome sellers wait until death, illness, divorce or a myriad of other circumstances that force the sale usually at a substantial discount. The right time to sell is when the market tells you it is time. Understanding and controlling the process is the best way to maximize value and obtain the rewards for your hard work.
No. 9: Not Working with a Professional in the M&A FieldThe most sophisticated buyers with the deepest pockets prefer to work with professionals when undertaking due diligence and working on the details of a transaction. Selling a business is a complex and often emotional process. While a business owner may have professional advisors for legal and accounting work, someone with decades of experience in M&A can better assist in coordinating these efforts and working with the M&A professionals at the acquiring company.
CARL DOERKSEN has been involved in valuing, researching and selling middle-market companies since 1986. He presently serves as Director of Corporate Development for Generational Equity which helps business owners release the wealth of their business by providing merger, acquisition and strategic growth advisory services.