The Art (and Science) of the Deal – Mistakes Sellers Make

If you’re thinking about selling your company, let’s get into a few things that might be important to consider.  Through this lens, we hope to help you understand the preparation and mindset that needs to be adopted as you approach one of the most significant decisions of your life.

Here are some of the top mistakes we have seen sellers make.

  1. Leave money on the table or worse – have a failed deal.

Time and time again we see sellers with a great desire to sell their companies, but lack the intention or will to prepare for it. The single biggest thing you can do to ensure a successful outcome is to prepare for a sale.

Ways to prepare:

Perform a value analysis. Sellers are too close to their companies, a trait that most likely contributed to its success. We recommend letting an objective third party come in and assess your company.

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Get an investment banker to give you a market based assessment. An investment banker can provide insight such as who’s buying, what are they paying, what headwinds or tailwinds will affect your value and how you can mitigate weaknesses.

Assemble your team and let them know your plan and timeline.  Your valuable team can only help if they know what you are up to.

Bottom line: Selling your business is like running a marathon – you don’t just wake up one day and expect to finish strong. A plan and rigorous preparation yield the best results.

  1. Underestimate the importance of having robust and accurate financial measures.

Entrepreneurs come in many sizes, shapes and predilections.  Typically, we do not see true financial experts (CFO or CPA-types) running a majority of entrepreneurial or founder-run companies.  CEO’s often take the form of tradesmen, honing their craft over the years in their industry. Or there is the sales-driven CEO, who rigorously attack revenue as the primary driver and focus of success. This isn’t to say that CEO’s that create valuable companies don’t grow in their financial intelligence and run financially healthy companies.

But let’s face it, unless you have some incredible secret sauce, the fundamental element of the sale of your company will be a financial one. Buyers are making an investment in what you have created (historical cash flows) and their assessment of what the future will look like after they buy it (future cash flows).  Boring, right?!  The degree to which you can convey your past and future through rigorous and accurate financial data will ease the path to a successful sale. It can be the difference in a good deal or a great deal.  If a CEO does not truly value financial intelligence and robust data as ways to view the company and make decisions, they will not capture the highest value for their company. Many are rolling their eyes at this point, but trust us, when making an investment, acquirers see robust financial data as the starting point to paying top dollar. If they have to un-cluster your financials there is a price to that.

While 95% of CEO’s tell us their financial data is great – 95% could be much better!  And here’s a secret, for most lower middle market companies, spending $10-30k for a Seller Quality of Earnings report or an annual audit from a CPA will likely yield a 10x return when you go to sale…surely that financial decision makes sense to even the most fiscally reticent CEO.

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Bottom line: Having great financial information and being able to parse the data by customer, line of business, product, etc., will not only help you make better decisions, but set you up for a great transaction.

  1. Underestimate the cost of not having the “power of positive alternatives” in your sale process

At Merit Harbor Capital, we firmly believe in the power of positive alternatives. We are, after all, in the “options” business. We create multiple options for sellers to exit gracefully, on their terms. (See our help sheet on “30 ways to leave your company”). We feel this honors your legacy, better than the standard three to four options that come to most seller’s minds; selling to a competitor, selling to employee(s) or management, or succession to kids who may or may not be best suited to run the firm going forward or whom may not REALLY want to run it.  When all exit options have been explored, we typically favor broad or strategic auctions that culminate in multiple bidders and ultimately let the market work to your benefit.

We have spent a great deal of time over the years helping owners “manufacture” a sale and 95 out of 100 simply don’t work and certainly do not maximize value in the transaction.  In the worst cases, owners either serve as the bank for the buyer or get their companies back when a “manufactured deal” does not work.

Running a time-limited, multiple-bidder process is not the easiest methodology, but we believe in hard work and robust processes that act on your best behalf.  We have all seen or perhaps been victim to auction-fever where we get swept up in a competitive auction and perhaps bid a hair too much. We want that same outcome for you.

Broad or Strategic auctions drive prices higher by having a time-limited competitive process and create an environment where a buyer must have your company…and is prepared to pay handsomely for it.

At best, we have seen an auction process yield 100% increase in value. At worst, we discovered enough value to cover transaction fees and some if not all of taxes on the transaction. Beyond that, we work very hard to make you the must-have company buyers are willing to pay more for.

Bottom Line: Get help to run a robust process that gets multiple bidders competing to own your business.  The results speak for themselves. The alternative, lowered value or deals that fall through, is 100% avoidable with proper advice and deal strategy.

See More Mistakes Sellers Make

About Merit Harbor Grouhttp://meritharborgroup.com/?p=1459&preview=truep

Merit Harbor Group is a leading M&A, Investment Banking, and Advisory firm helping lower middle-market companies create, grow, optimize and capture Enterprise Value, while simultaneously achieving owners’ personal and financial goals. Focused on sell-side, buy-side and capital raising activities as well as strategic advisory services.  Most of Merit Harbor’s senior deal makers and advisors have sat in your shoes as Entrepreneurs and CEO’s and understand the stakes at hand.  Profit from our experience. Merit Harbor Group expertly serves companies in a wide range of industries. Arrange a consultation today 253-327-1490.

Understanding the value of your company is primary to knowing how to navigate the next steps for future growth. Take a 15-minute assessment to gain insights into your firm's value and an overview of your firms Value Gap as compared to your peers. Merit Harbor helps CEO’s and Entrepreneurs create valuable companies by focusing on improving your critical value drivers.

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