In our previous article The Art (and Science) of the Deal – Mistakes Sellers Make we went over some of the top mistakes we have seen business owners fall into when considering exiting their company through a sale. It produced such a lively conversation here at Merit Harbor Group that we decide to continue the conversation with more ways sellers can avoid costly mistakes.
Here are more of the top mistakes we have seen sellers make.
Not putting themselves in the buyer’s shoes – No real defensible post-close growth plan.
Many sellers attempt to time the market and sell when they have reached the peak of their corporate life-cycle. They created the baby and are willing to hand it off as it matures. Leaving the growth plan (and future stream of cash flows) up to the buyer will surely yield a discount in overall value. Expressed differently, most buyers will need your “plan” just as much as you need their cash to take off the table. After all, you have lived the market in good times and bad. Weathered storms, made mistakes and tried multiple approaches to sustainable growth. That has value. Tacking 20% a year onto a proforma “because we always (historically) have grown 20%” is not a defensible strategy.
When we assess most lower middle market companies, the single largest area of value enhancement (getting a better price) lies in the sales and marketing process and which markets the company is pursuing. To many, this falls under the “selling the future” category or “de-risking the future.” Buyers pay for this as well.
Bottom Line: Work with your advisors to know what buyers look for. Understand the drivers of their valuation. By de-risking their future with a solid post-close growth plan and a specified leadership team to execute that plan, you will capture additional value in the transaction.
Trying to go it alone – The Deal Team
Many owners, who are busy running their own businesses, and even those with seasoned CFO’s and management teams, often underestimate the sheer work involved in conducting a robust process; preparing, marketing, vetting acquirers, responding to due diligence in ways that don’t yield discounts and getting the transaction across the finish line. Oh yea, did I mention running the business and keeping a positive growth and earnings trajectory throughout to maintain buyers’ confidence? “Manufactured deals” particularly drain management’s attention on linear processes, compared to robust auction bidding wars.
Coordinating with your trusted advisors early in the planning, preparation and readiness process can yield significant fruit and make the “deal team” much more effective. Your CPA and attorney, led by your investment banker and coordinated carefully with your wealth manager will form the core of your deal team. This is a process, not an event, so all of these professionals need clear communication between them. It is vital to securing the best outcome. Keep in mind, many companies on their way to a successful sale often have outgrown their traditional advisors.
M&A is a complex game, and often we are working with folks on the other side of the table that are “professional buyers”. Trust you Investment banker to suggest an appropriate deal CPA / tax specialist as well as an M&A attorney who specializes in M&A and corporate securities.
Many sellers when reaching the pinnacle of their career, marked by a successful sale of their company, may have outgrown their wealth managers or stock brokers expertise. The larger the post close chips taken off the table, the higher the need for more holistic advice and complex solutions to new found exponential wealth. While your current wealth and tax advisors have helped you grow your traditional wealth, the primary job of your post-close advisors is to ensure you keep as much of your new found wealth from unnecessary taxation or loss of principal.
Even with a capable and coordinated deal team, I cannot emphasize enough the amount of time it will take to consummate a great transaction. The CEO/Entrepreneur as well as the CFO and leadership team will be taxed during this time. Creating bandwidth and investing in opportunities for self-care during this time will be critical to finishing strong.
Bottom Line: You can build a strong deal team by depending on recommendations from your i-banker who has a healthy respect for collaboration with other best-in-class deal professionals. A strong deal team will yield better outcomes every time.
Selling too late
As entrepreneurs we like to be able to control our own destiny. In many ways that is one of the very traits that has helped us create companies of value. We had a better way to do it, created a better mousetrap or flat out did not want to work for someone else – I call this having greater vision than our peers ;-).
Often times, if we are “planners” we have a “perfect” time to sell. Perfect usually means when we are ready. Ready to slow down, ready to quit. Ready from a financial or emotional standpoint to exit. Or maybe we have reached a critical age milestone.
Some wake up one day and decide “it’s time” without much planning, while others lament and study macro and micro market trends, competitive intelligence and try their best to time the market and get “un-paralyzed” as to what truly is the perfect time. Yet others let fear drive their timing.
Most of these measures are a bit myopic, and do not look at many other important factors.
- Where is your company in its trajectory within the corporate life-cycle? On its way up? Plateaued? On its way down?
- Margins and growth rate increasing? Flat? Declining?
- New products being launched? Or are products/services offered a bit tired?
- State of leadership? Recruitment?
- Responses to disruption – robust and tech enabled?
- Are sales strategies changing to the ways new buyers want to buy?
- Fresh cap-ex feeding growth and innovation? Or old machines?
The point is, most companies we see that are date and time driven or seller lifestyle driven ignore market conditions and at times do not look inward as to where the company is in its corporate life-cycle, management energy and investment in the future. In our experience, most entrepreneurs sell too late or do not catch the market or their company at its peak.
Much like picking stocks, trying to “time the market” is never an exact science. However, information available as to the current deal markets show; deal multiples are at historic highs, interest rates are at a near all-time low, corporate and private equity balance sheets are at all-time highs and organic growth is tough to come by. Therefore, M&A as a strategic answer to growth is being considered in many a corporate board room, making now an ideal time to sell.
Click here to download 10 reasons why now is the right time to sell your company
Bottom Line: Don’t miss the window this time! It’s a great time to capture your life’s work in a sale of your company.
About Merit Harbor Group
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 Harbors’ 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.