A recent study revealed that more than three-fourths of companies in the $5 million to $50 million range expect to buy another company or be sold within the next few years. Given the flurry of merger and acquisition activity the past several years, those expectations aren't terribly surprising. Capital is plentiful, investors are hungry, and pricing has been favorable as a result.
Reality, however, may prove far different than expectation for many of those companies. Despite the desire to jump on the business consolidation bandwagon, the failure rate for such attempted alignments is high. In fact, only about one-fourth to one-third of small companies put on the market are ever sold.
What accounts for such a large disparity between intention and execution? Clearly there are breakdowns occurring in the courtship stage.
The business landscape is full of companies today that didn't exist a decade ago. Entrepreneurs and first-time business owners are taking on all sorts of challenges they've never faced before, among them selling the business when there is a strategic advantage to be gained in doing so.
Indeed, selling a business is far more complex than selling a car or house. Making mistakes in the attempt to sell a business will not only short-change the owner, but can sometimes have a detrimental effect on the business going forward as well.
Here is a list of the 10 most common mistakes that first-time sellers might encounter when selling a business:
- Value Drivers. The company's historical financial statements don't give evidence of the true value of the business. Many owners of closely held businesses deliberately suppress profits to reduce taxes. Financial statements need to be restated to reflect the true operating performance of the company. In addition, a prospective buyer will be interested in unrecorded assets or liabilities. A comprehensive review of the business will look at just such factors, well beyond what appears in the historical financial statements.
- Price. Owners typically are unrealistically high in the price they are willing to accept. They often determine a price based on factors that have no factual basis. Buyers need to be able to pay for the acquisition from the company's future earnings, which will impact the price they are willing to pay.
- Motive. Buyers are usually interested in growth potential, but sellers usually focus on historical performance. Buyers are motivated by the potential for return on investment, and sellers too often are ill equipped to answer buyers' questions in this regard.
- Counsel. Sellers may become sponges for advice when they are facing such a significant business and career decision, but they usually soak it up in the wrong places. People close to the transaction, people inside the company, peers in the business community, family members, etc., may have biases out of concern of the owner or themselves. The experience and the impartiality that come with an outside intermediary usually prove invaluable to the owner.
- Buyer Profile. Sellers often assume that the best buyer for the business is a competitor, a customer, a supplier, or an employee. In fact, they may be the worst. If the deal falls through as so many do, a lot of confidential information about the company has been disclosed. Sellers must negotiate with prospective buyers carefully, keeping intentions confidential unless they are ready to sell at a bargain price.
- Buyer Locale. The universe of prospective buyers need not be limited to the immediate geographic region or the owner's established circle of contacts. Thousands of quiet private investment groups and offshore investors are interested in acquiring profitable, U.S.-based, closely held companies.
- Positioning for Sale. Owners need to take time preparing the company for sale before identifying or negotiating with a buyer. Depth of organization, growth opportunity, reputation, favorable market conditions, industry leadership, and many other intangible qualities will motivate buyers to pay more. Assessing the company's position in these and other areas and taking corrective actions will have a significant effect on the ultimate sale.
- Documentation. Buyers want to know what they are getting, but sellers often aren't equipped to provide the right documentation. Unadjusted financial statements accompanied by a product catalog and a company brochure are not enough. It takes market research and significant documentation to lay out the company's growth potential, which is what buyers most want to study.
- Personal Planning. Sellers often give little thought to their real personal financial needs following the sale, except that they expect to be paid. If they plan properly and can wait for some of the payment, they may be able to structure the payment of a total higher price. When sellers insist on a "cash only" deal, savvy investors not only question why, but they also discount their offer price.
- Negotiation. Who should be the first to raise the question of price? Always the buyer, never the seller. Value is a subjective matter. An experienced buyer who sees big future potential may have a higher price in mind.
For first time sellers, correcting these common mistakes will help ensure they strike the best deal.
Are you a first time buyer of a business? If so, check out my YouTube video on advice for first time buyers.