Selling your business can be stressful and overwhelming, and many factors must be considered in this high-stakes transaction: timing, deal structure, and legacy goals are just a few. However, armed with knowledge and guided by experienced professionals, business owners can expect a profitable and efficient transaction. Be aware of the following preventable mistakes so you can anticipate and prepare for specific issues that may come up during the deal process.
1. Ignoring the Structure of the Transaction
Understanding the value of your company is critical when determining whether an offer is strong enough to compel you to sell the business. Not all offers received will be comparable; they may appear similar when you are looking at the total consideration, but the terms used in the offer can have a serious impact on your net proceeds.
An offer can contain a mix of cash at close, deferred purchase price payments, earnouts, and seller-financing. Knowing how each of these items functions and the likelihood of receiving delayed payments is crucial to deciding which offer to take. An all-cash offer may seem great at first glance, but if you receive another offer with a lower cash amount at close plus a deferred payment in the form of salary, seller notes, or an earnout, it may be more profitable than the first.
Additional value to you also lies in the structure of indemnities, escrows, and holdbacks. Indemnities are a level of business risk protection that sellers are willing to provide to the buyer of a company. Indemnities range in value based on risk; structuring the mechanisms of indemnities in your favor allows you to retain or capture additional value. Escrows and holdbacks are usually tied to indemnities and/or performance metrics of the business post-merger and vary depending on the business characteristics. Knowing how to navigate these components of the deal structure is vital to ensuring that money isn’t left on the table.
2. Assuming Your Company Is Already Deal Ready
The key to successfully selling your company is a lot like the key to winning a sporting event: without proper preparation, the game will be a runaway for the other team. Selling your company requires work and documentation; you need to make this information available to potential buyers. Any lag time in answering questions or providing documentation increases the risk of a buyer walking away from a deal due to circumstances beyond your control. To ensure the sales process doesn’t have any potential snags, prepare your company by completing the following tasks.
Review your company’s accounting practices. Acquire quality audited financial statements from a well-known accounting firm. In their absence, make sure all financials are prepared in accordance with generally accepted accounting principles (GAAP). Make a note of any exceptions to GAAP that your company’s financial statements may show.
Document the in-place operations your company follows to easily convey production processes.
Identify key employees and create a plan to ensure their loyalty during the transaction process.
Clarify your company’s governance: note who has a say in the decision to sell your company and who should be involved in the process.
Identify any potential liabilities facing your company and start mitigating these risks.
A buyer will pay a premium purchase price for a going concern with sound business practices and goals. Know how you want to grow your company and its potential for growth. Be ready to support these objectives to interested buyers.
Outline key growth strategies, such as launching new products or exploring new geographies to allow your company to reach its goals.
Ensure the company has a budget in place to fund any capital expenditures needed for these goals.
Demonstrate the continued demand for your company’s products or services by providing research on the industry your company serves.
Strategizing on these future decisions shows continued growth potential to a buyer and gives you the ability to turn down an offer that may not meet your expectations.
4. Disregarding Industry Trends
Mergers and acquisitions happen all the time, and most likely you have heard of some in your industry. Do your research to see how consolidation is affecting your industry – competitors, vendors, and customers. Consolidation in your industry may require your company to increase efforts to differentiate itself from other businesses as new competition arises. Similarly, your customers may also be consolidating, causing your once-robust stable mix of clients to dwindle to a precious few. A limited customer base may be acceptable for your competitor but may put your business in jeopardy. Mitigate these risks by using your industry contacts to ensure your business is being run similarly to those of your competitors; for example, know if it is the industry standard to have customer contracts or supplier agreements. This knowledge enables you to understand the challenges of the changing competitive landscape – always an advantage when talking with potential buyers.
5. Selling Your Company Alone
Selling your company takes time and energy, so stay focused on managing your business operations during the sales process. Installing a team of advisors will help lessen the load so you can keep running the company: you will need to hire an accounting firm for the company, a tax advisor for yourself, a lawyer, a wealth advisor, and an investment banker. These professionals work cohesively to help minimize any disruption to your business operations.
The accounting firm will review your business financials, identifying areas that may need improvement to make the sale of the business proceed smoothly.
The tax advisor will work with you to minimize your tax burden from the proceeds of the sale.
The lawyer will manage the legalese and work to make the documentation as favorable to you as possible.
The wealth advisor will help you invest your proceeds.
The investment banker will work with you and your other professionals to complete a comprehensive memorandum, identify buyers, solicit offers, handle the business negotiations, and work tirelessly to ensure you are getting the best deal you can.
When selling your business, make sure you do all you can to protect yourself and obtain the highest value. Having a team of professionals who understand the process can eliminate the common mistakes noted above.
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