The Most Common Mistakes Owners Regret When Selling Their Business

Through the years it always seems to be the same mistakes owners make when going through the process of selling their business. Below are the most common, and often times the most damaging mistakes made while attempting to sell their business and complete a transaction. Take them to heart, always be mindful and the divestiture process and final transaction will be successful.

from: howtosellmybusiness.com: A Business Intermediary group and M&A information website dedicated to helping privately held companies improve the value of and assist in - the successful selling of their businesses.

1. Over Valuing Your Business and Unrealistic Expectations:

This is the first mistake. And made by too many, too often and which only leads to frustration, confusion and unnecessary delays in discovering a "real buyer".

The owner should understand that the buyer is buying a business that he can make money with, not what you (the owner) think he should be making.

Look at your business dispassionately. What would you pay for it - and why?

You and your Intermediary should analyze the business, its cash generating capabilities and derive an understanding of what the value range should/could be, before it is even listed. The buyer will pay a fair market value – not a seller's dream price. Understand fair market value, who the candidates might be to acquire the business and the Intermediary should attempt to bring, if and when possible, multiple buyers to the conversation and create a competitive bidding tension.

2. Neglecting the Day-to-Day Operations of the Business:

Once due diligence begins, run the race until the echo of the whistle, money is exchanged and hands are shaken. Never, ever let up on the day-to-day operating of your business while in due diligence. The Intermediary should handle the noise of the M&A process, your job is to run the business. There are more stories of business owners mailing it in once due diligence begins only to find the business has deteriorated through time so much so that the buyer reconsiders. Do not become one of them.

The business's performance must be maintained or problems emerge from every direction - buyer, attorneys, banks, and employees. Play this hard until the very end of the game. The sale!

Remember, a current P&L is usually requested (particularly if a financial institution is involved) before the closing table. If you are down 10% or more in top line revenue or cash flow, year to year, you may have to revisit the negotiating table or postpone "closing" for a period of time. In addition, more deals collapse at the end of due diligence than you can imagine. The old adage among intermediaries is a deal must die three times before it can be completed. If the deal were to die, completely, then what do you do? Are you prepared?

3. Over Estimating the Forecasting of Your Future Business:

The lifecycle of selling a business can take nine to eighteen months or sometimes longer depending on the complexity of the deal. Be prepared and understand that at certain points along the cycle you will be asked (by the buyer or a financial institution involved) if you are maintaining your business's financial forecasts. If not, or if there is a discernible negative change, it could be a deal killer or lead to a re-negotiation of pricing and terms. This is particularly true if financial institutions are involved. Consider carefully the financial projections, sales goals and results and closely monitor.

4. Failing to Manage Deal Fatigue: Not Giving Up Too Soon

Deal fatigue is something that both the seller needs to understand and the Intermediary must always be cognizant of and prepare his client for - during this long and exhaustive experience.

The seller needs to appreciate that the transaction process is a marathon, not a sprint. This takes time and there are always moments of frustration and discouragement. Mindset, by the seller, from the very beginning is extremely important. Be prepared – it may take nine to eighteen months in a transaction cycle, sometimes more, to move this to a conclusion. Due Diligence itself may take two to four months. It is also important that the Intermediary be aware of a seller's fatigue and carefully monitor a client's disposition.

5. Not Maintaining a Transaction Cadence:

One critical aspect moving through Due Diligence, and often neglected, is establishing a transaction cadence, maintaining it and seeing to it that all participants, from both the buyer and seller sides, follow. Make sure, before you even start, that the attorneys, accountants and business advisors are aware of a timeline and that all need to work, as best they can, to committing to and following through each step of the way. Time can kill many deals. Keep everyone involved and moving forward.

6. Not Qualifying a Buyer:

This happens more often than is necessary. The buyer must be thoroughly vetted and he must understand what is required of him as everyone moves through the process. In particular, how will he fund the transaction? Specificity is import. Show us the money.

7. Your Team and Staff Hear and Feel Rumors:

Confidentiality is critical. Be aware of the destructive force of the rumor mill.  

This can really hurt the performance of the company and/or cause key people to begin looking at alternative employment situations. I have witnessed this before, key people - hearing about a pending sale several days before closing, confront the current owner with demands for higher salaries, and/or benefits and/or working conditions. The result is, through no fault of the owner, business performance or the transaction structure the deal begins to deteriorate and possibly collapse. Confidentiality is critical to a successful closing.

8. Mismanaging a Must Sell Situation:

It happens too often, when a seller reveals through a conversation with the buyer, that they are moving out of town, or growing tired of operating the business, or they are just overwhelmed at how fast the business environment is changing. The seller conveys urgency to conclude a sale. It opens the window to receive under-priced offers and/or stringent terms and conditions counter to the interests of the seller. Owners must always be careful to not reveal any frustrations and/or impatience with the process. An Intermediary is valuable here.

9. Not Organizing Key Employees to Remain After the Transaction:

All buyers will be very concerned that key members of the management team and organization will remain post transaction. Have in place contracts and incentive programs that help bind key people to the business. These key employees are extremely important assets of the business. They are critical to the operational success of the organization. Treat them as such.

10. Crafting an Open Ended Letter of Intent ("LOI"):

Have your representative’s review and insist on a LOI that satisfies the buyer’s needs, but is clear and complete in the areas of required documentation.

When you agree and sign a LOI, it is at that moment you (the owner) relinquish control and power of the transaction process to the buyer. Negotiating leverage has now rotated.

So clarity, a mutually agreed upon time line and transaction commitment must be spelled out. It just saves everyone legal and advisor expenses. Make sure the lawyers, both sides, get the memo! You and your intermediary want to sell a business, they (lawyers, advisors etc.) want to sell time.

11. Failing to Consider - Can You Work with New Ownership through Transition:

Remember, post transaction, there will be a “transition period”. It could be 2 months up to 12 months and in some instances consulting agreements beyond. Make sure you can have a comfortable working relationship with the new owners. This is especially critical when an “earn out” is involved.

12. No Fall Back Plan:

It is more common than you think, that a transaction goes up to the closing table and the deal falls apart, or during the long and exhaustive due diligence process, the principals grow weary, and at times angry, and say – enough. Is there a backup plan? Are you prepared to continue operation? Are additional buyers available to be contacted?

The deal is never done until the deal is really done, that is, you have the money in the bank!

These are some of the most common mistakes and areas that sellers fail to consider and prepare for. A professional Intermediary’s responsibility is to guide you through this exhaustive process. Be prepared for what is to come and keep in mind all of the above and in the end, yes it will work out well.

If you personally, or your company, would like help or more information on how to sell your business - or knowledge of the "best practices" necessary to make your business more valuable and salable visit:www.howtosellmybusiness.com 

or contact directly:

Rex Rossi

[email protected] | 708.433.9410

Founder and Executive Director - howtosellmybusiness.com Senior Intermediary and Business Consultant: Premier Business Group, Inc.

Preeminent M & A Specialist to Privately Held Companies: Manufacturing, Distribution, Service and Agencies in the Chicagoland and Midwest markets.

Copyright 2018 R.M. Rossi