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Four Pitfalls to avoid, when selling your business
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You face one inescapable fact as a business owner: at some point in time, you will leave your business either by choice or force of circumstance. The crucial question is whether the process will leave you wealthy and satisfied or disappointed and regretful.
Naturally, you hope to earn as much as possible when selling your company. Yet the distressing reality is that most private business owners fail to gain full value from the sale of their businesses.
As a Mergers & Acquisitions (M&A) Advisory Firm Henberger Group has worked with many owners of emerging growth and lower middle market businesses, helping them achieve maximum value from the sale of their companies. Over the years, we have identified a variety of missteps that keep owners from getting what they deserve for businesses they often have spent a lifetime building. Following are some of the most common pitfalls to avoid.
Using a standard formula to value the business
When considering the sale of your business you must first determine its value to potential buyers. Selling a business without knowing its value is like playing poker without looking at the cards - in this case gambling with what may be your single greatest financial asset.
One of the worst things you can do is value the business on the basis of a single standard formula, especially one that focuses solely on a single year of its historical financial performance. Strategic buyers - the ones willing and able to pay a premium for the company - buy the future of a business based on a strong past performance and a promising future. Past business plans with accurate financial forecasts are perhaps the most important argument in developing credible pro forma financials.
To be convincing preparing pro forma financials must be plausible, which requires extensive market research and analysis to justify the reasonableness of assumptions regarding revenue and profitability trends, growth rates, market dynamics and other factors.
Targeting the Wrong Buyers
It is all too common for company owners to assume that local competitors, major customers, employees or a significant vendor represent the best buyer prospects. In reality, these are often the worst buyers, since they base purchase decisions on the desire to acquire assets cheaply, discounting the positive aspects of the company. Moreover, such companies rarely have the necessary financial resources and frequently even require the owner to help finance the transaction.
Savvy owners look beyond these prospects and seek strategic or strong financial buyers able to pay a premium to acquire future growth and the company's intangibles - not just its assets. These buyers are typically large private and public corporations or private equity groups.
Not Understanding the Critical Importance of Timing
A real estate maxim states that the three most important considerations are location, location and location. The M&A equivalent is timing, timing and timing. (If you don't think timing is important, ask yourself if you would rather try to sell an Internet company today versus seven or eight years ago). Many sellers make a mistake by focusing on their own preference, rather than selling when economic conditions are favorable or timing is right for the buyer.
The average owner sells three to seven years after the optimal time for a sale. In some cases they fail to anticipate a change in the market, or wait until a personal or professional crisis necessitates a sale of the business. Whatever the cause, delay can erode value.
In addition, owners often underestimate the time required to sell a business. Astute owners develop an exit strategy long before they expect to sell the business. They understand that it typically takes 12 to 18 months to prepare for and complete a transaction. Moreover, they understand that the new owner may want them to remain with the company for a period of time following the sale to assist with the transition and help guide integration of the two organizations.
Using the Wrong People as Dealmakers
Owners of private businesses frequently rely on their accountant to help them value their company and serve as a dealmaker. Others have their attorney play this crucial role. This is understandable; after all, such professionals have gained trust and credibility through years of valuable service, and under the right circumstances they play a significant role in the sales process. However, few have the knowledge and experience needed to effectively value a company -- let alone the time, resources and network of contacts necessary to serve as a dealmaker.
Many business owners make a greater mistake by trying to manage the deal process themselves. It is the rare owner who has the expertise necessary to manage this complicated process. Most have emotional attachments to their businesses that preclude objectivity. Yet the main reason why owners should not serve as the dealmaker: they can become distracted from their primary responsibility - running the company. Without their leadership, company performance usually suffers, which in turn diminishes company value.
Done properly, the sale of your business can be one of your most rewarding and exhilarating experiences. Conversely, a poorly handled transaction can be the most costly mistake you can make. Becoming educated on the process may be the best investment you can make.
858.345.4435
Four pitfalls to avoid when selling your business
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Copyright Henberger Group Inc.
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