Top Five Mistakes Business Owners Make When Selling Their Company
In business as in life, the most successful people know when to ask for help. Selling a business is often a confusing and difficult process, and most business owners only do it once in a lifetime. Very few go through the process enough to really become comfortable with the ins and outs of selling a company successfully. Writing directly to business owners, here is my list of the top five major mistakes that you absolutely must avoid when it’s time to take an exit.
#5 – No Leadership Bench in Place: When an acquirer buys a business, they want to know that the success the company experienced in the past will continue in the future. If a business can’t function without the owner being present to run things, then a new owner will have a very difficult time when they take over. The process of transitioning leadership responsibilities as a business grows is difficult. I grew up working in my Dad’s lumber company, and I watched him struggle through this process so I understand the challenges. However, for a business to maintain healthy growth, and especially for it to be sold successfully, there must be a strong management team in place that can function without the owner. The best way to avoid this mistake is to continually push to be working ON your business instead of IN your business. There are lots of resources and executive peer groups that can help you make this transition successfully. If you need help, I’d be delighted to help you find the right connection.
#4 – Not Understanding Valuation: This one cuts two ways. On one hand, it’s easy to overestimate what your business is worth. If you’ve spent your life building something, you are naturally going to be proud of it, but that doesn’t mean you’ll be able to sell it for the number you have in mind. On the other hand, it’s also easy to under value your business. Anyone who works at the same thing for a long period of time is going to develop a degree of “tunnel-vision” – it’s perfectly understandable. Knowing what a company is really worth is a complex question, and if you are too close to something, it’s easy to miss the bigger picture. The single best answer for what your company is worth is always the simplest: “What would someone be willing to pay for it?” The mathematics of business valuation is a big and complex topic about which the experts have written many volumes. However, the question of how to make sure you receive the highest possible value when selling is a much different subject and it can be answered fairly succinctly.
To receive the best possible value, you have to have a robust competition among potential acquirers who all understand the business and are willing to compete to get it. This robust competition means that you as the seller will have multiple good options when the time comes to negotiate. Without a well-run process and the leverage that comes from this competition, there is no way to ensure that you have received the highest possible value or the best overall terms and conditions.
#3 – Poor Timing: It’s impossible for me or anyone else to answer when is the best time for you to sell your business. Only you are in a position to determine what’s best for you and your family. However, there are two fundamental truths about timing that I can share with absolute certainty. First, it’s better to sell when things are going well and moving up than the other way around. There are business owners all over who tried for years to sell their business when the economy was down, and now that things are going well again, they want to stick with it for a while. I certainly understand the emotions behind this. You’ve been working like a dog and sailing onto the wind for so long that you just want to have the wind at your back for a little while. It makes sense. If you are taking advantage of good economic conditions to build your company’s value, that could be part of a good plan. However, if you are going to ride the wave until things turn down again, I’ll just say it this way – you’re doing it wrong.
Second, the right time to sell your business is when you have taken enough time to position your company well and to develop a good plan. Selling a business for the best possible value doesn’t happen overnight or on a whim. If you are a business owner who likes to “pivot” or if you really value being “agile”, you might have difficulty exiting your business with great results. Exiting at the best possible value takes diligent planning and execution. You’ve likely read “Good to Great”, the excellent book by Jim Collins (if
not, get it today). Hedgehogs make successful exits. Foxes leave lots of money on the table.
#2 – Not Prepared for Due Diligence: Every business acquisition process includes a due diligence phase where the acquirer examines all the documents and details to make sure that they are getting what they are paying for with no nasty surprises. It’s a shame that it’s necessary, but it’s a fact of life and a part of doing business. The amazing thing is the number of business owners who attempt to sell their company but make no preparations for this part of the process. (We’ll set aside for now the crazy people that actually think they can hide something – it always gets discovered – and the litigation attorneys do a little dance). Que up the Jeff Foxworthy redneck impersonation voice – “If your business records are in a paper sack in your mother-in-law’s sister’s neighbor’s tool shed …. you might be a redneck”….. and you will have a really hard time selling your company. You might get it done, but you will certainly not receive the best possible value. Think of it this way. Every business should be run in such a way that it’s ready to be sold at any time. You need to be organized enough that you could simply show someone the file room and let them due diligence away. You should never actually do that of course, but you need to be organized at that level, both for the health of your company today, and for a successful exit when that time comes.
#1 – Accepting a “Fair” Offer: Right now according to some estimates, there are over 10,000 private equity investment groups in North America. Collectively, they have over one trillion dollars in cash, often referred to as “dry powder.” These firms are highly motivated to buy businesses and deploy their capital. If they don’t, their investors will recall the capital and they won’t make any money. All of them have aggressive research and outreach campaigns that are actively searching for businesses to acquire. Most business owners receive calls and letters on a regular basis. These PE firms know that they are in a hotly competitive environment. When they reach out to a business owner, they are serious and they make attractive offers. They do this because they want to establish exclusivity quickly and avoid a competitive sale. However, don’t forget, these firms make most of their money when they sell a business. They are motivated to make deals, but they are also motivated to pay as little as possible. The single biggest mistake a business owner can make is accepting an unsolicited offer that seems fair or even really attractive. When you establish exclusivity with a single party and begin to iron out the details, you are stuck and you have no leverage in the negotiation. I spoke to a business owner recently who went down this path and said “I feel like I have a gun to my head.” The attractive offer that you start with never goes up, but it can easily go down as the process unfolds. Also, in addition to watching the price grow smaller, without negotiating leverage, you have no way to ensure that the terms and conditions are fair or that your employees will get a good deal. Wading in to a one-way negotiation for a once-in-a-lifetime transaction without being prepared and without creating a robust competition among the buyers can be an unmitigated disaster with millions of dollars left on the table.
The Bottom Line:
Selling a company successfully and for the best possible value takes a lot of hard work. You have to have the right process and the right expertise to prepare well and get the transaction across the finish line successfully. To get the best possible value for your lifetime of work, you absolutely must create the right competitive
environment and maintain a strong negotiating position.
The reality is, to get this done successfully, you are going to need help. Please reach out to us. We’ve been exceeding expectations for nearly thirty years, and we will produce great results for you too. Take a look at my recent article about a transaction we completed earlier this year. We helped our clients receive $40M more than they were expecting. This outcome was the result of a great process and the expertise of a highly experienced team. Let us put that experience to work for you.