Advanced preparation. Advanced preparation increases both the probability of selling a business and the valuation that will be achieved. Certain things may require years of advanced preparation such as introducing new products or targeting new markets, while other important initiatives only require short term planning and preparation to best position the business for sale. Areas include having current and well organized books and records; anticipating and addressing any environmental concerns; negotiating critical lease extensions; eliminating non-utilized equipment and inventory; cleaning-up the facility so it presents well; anticipating and being prepared to answer probable acquirer questions. It is important to anticipate what information a buyer will require and have it ready for presentation in advance.
Not seeking the right professional advice. The sale of an entrepreneur’s business is frequently the largest and most important financial event of his or her life – for most, it is a once-in-a-lifetime event. The successful sale of a business requires a carefully planned and methodically structured process in which each step is handled right the first time, to maximize the financial reward. Owners are experts at successfully running their companies, but few are prepared to navigate this complex process and, therefore, are at a distinct disadvantage when properly presenting the intangible values and negotiating with experienced strategic and financial buyers. This is vastly different than typical negotiations that are part of day-to-day business. A professional intermediary provides invaluable advice, support and representation – most importantly, the benefit of experience that can make the difference between a successful transaction and a missed opportunity.
Selecting the wrong buyers. All too often, business owners will focus on prospects they already know – vendors, customers, employees or competitors. Buyers such as these frequently lack the means and motivation to pay what a company is really worth compared to more sophisticated buyers who have strategic acquisition goals and are willing to pay accordingly. In contrast to local buyers, or those known to the business owner, some of the most qualified are often among the most unforeseen. For example, companies – both public and private – often pay premium prices to acquire seemingly ordinary businesses that offer a synergistic advantage to their current operations. For many, private equity groups are among the most desirable potential buyers. Foreign buyers also play a role in realizing optimum value for U.S. companies. A business owner is not typically intimate with these markets and therefore may miss out on an opportunity to maximize the transaction.
Improper or incomplete documentation. Documentation prepared from the perspective of potential buyers can present a company’s past as a valuable, saleable future. Complete and well-prepared documentation will present a realistic, defensible foundation for the company’s value and substantiate buyer expectations of future earnings and return on investment. This will provide a basis for meaningful comparison with other investment opportunities and present a detailed, accurate and strategically compelling portrayal of how the business is likely to perform in future years. The documentation provided to a buyer should highlight the intangibles of the business as well as key expansion opportunities that the business is positioned to capitalize on.
Providing undefended financials. A common mistake is to provide potential buyers with internal or accountant prepared financial statements and corporate tax returns. This is a fundamental error. Financial statements are prepared for tax purposes, not for business sale purposes, and do not accurately reflect the true profitability and potential earnings capability of a business. Proper interpretation and presentation of financial information is a critical step in the sale process. Acquirers must be presented with an adjusted or “recast” format, to ensure that they are able to “read between the lines” of the financial statements and tax returns to appreciate the total discretionary pre-tax income that would be available to them. Failure to properly present true “recast earnings” reduces the perceived value of a company. When reviewing financial presentation, we analyze more than 60 potential recasting adjustments.
Dealing with a single buyer. Without multiple buyer prospects, a seller has fewer options and limited leverage in terms of obtaining the desired price and terms. Multiple buyers in the mix will create a competitive environment and instill a sense of urgency into the buyers involved. When there is one buyer candidate the buyer is in control; when there are multiple potential buyers, the seller is in control. Having multiple options increases negotiating strength by creating less dependency on any one potential acquirer, and the perceived competition drives up the purchase price. Providing a fall back position in the event that a particular negotiation derails for any reason, increases a seller’s leverage throughout the process and avoids the pitfall of having to restart from the beginning. Experienced buyers are less likely to attempt to take advantage of a situation if they perceive that there are additional interested parties and professional representation.
Article written by Stephen J Goldberg
Sun Mergers & Acquisitions