So, you want to sell your business?
Maximize the value of your business by avoiding these pitfalls
By Mark Groulx
One of the most important transactions that will occur in a business owner’s lifetime is the sale of their company. However, many owners underestimate the amount of time and work required to properly sell a business. This can lead to costly errors, unnecessary delays, and transactions that fail to close.
Here are some common mistakes to look out for when selling a business, whether it be a contracting company, wholesaler or other related business
Unrealistic price expectations
Many business owners attempt to sell based on unrealistic price expectations only to be disappointed by the offers they receive. Companies are typically valued on a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). The exact multiple depends on numerous factors specific to the company. In general, companies with recurring revenue such as maintenance contracts will be worth more than companies that are dependent on bid/spec and project-based work. Larger companies tend to attract higher multiples than smaller companies, as do high growth companies.
Further complicating matters is the calculation of EBITDA. Buyers and sellers have various adjustments they may make to the EBITDA number, which can increase or decrease the final sale price. Therefore, it is important for business owners to understand how companies are valued and to set realistic price expectations.
NEGOTIATING WITH TOO FEW BUYERS
Potential buyers will often reach out directly to similar companies in their own industry or a related industry in the hopes of negotiating a private deal. While the resulting proposal may look fair, owners should keep in mind the buyers are likely experienced acquirers who are looking to negotiate the best deal for themselves. You are likely to get a less than full value for your business if you do not have an understanding of deal structures and if you do not survey a wide list of potential buyers. Additionally, sellers should be careful to review the terms of any proposal since there are multiple ways to make an offer sound better than it is. Deferred payments, earnouts, asset/share sales, and working capital adjustments are just some examples of deal terms that can impact the sale proceeds significantly.
Lack of a management team
Companies that are dependent on the owner’s constant involvement are less attractive to buyers. This concentration of power usually means the value of the company will decrease once the owner exits. To reduce some of the risk, buyers may require owners to stay on for a longer transition period. However, this may not be desirable for aging owners who want to retire.
There is a new category of buyers called Search Funds which can provide a solution to this problem. Search Funds typically consist of one or two individuals who are looking to buy and then run a company. In effect, they become the management team for the newly-acquired business. Nevertheless, it is still recommended to have a good management team in place prior to a sale. Companies that can run in the owner’s absence generally receive higher valuations.
In a sale transaction, buyers will request a significant amount of information to evaluate the company. This includes customer data, supplier data, fixed asset listings, intellectual property, employment and HR records, insurance, tax filings, legal documents, financial statements and much more. Business owners should be prepared to produce and deliver this information on a timely basis.
A transaction is simpler and quicker when the company has an organized and systematic way to manage its records. Companies that rely on manual processes are likely to experience delays and business disruption that could otherwise be avoided. Furthermore, buyers may decide to walk away from a deal if there are unexplained gaps in the information delivered.
Not using an advisor or intermediary
Despite the issues outlined in this article, many business owners attempt to negotiate a deal by themselves or with the assistance of their lawyer and/or accountant. While both these professionals are crucial to the transaction, a mergers and acquisitions (M&A) advisor can help.
The services of an M&A advisor are designed to help maximize the value of the company and ensure a smooth and timely transaction.
Services typically include:
1) Analysis and advice regarding the valuation of the company.
2) Preparation of a Confidential Information Memorandum. This is a 20- to 30-page report describing the company in detail which buyers will use to evaluate the opportunity.
3) Preparing a Buyers List of the most likely buyers including industry buyers, financial buyers and search funds.