While this list is not all inclusive, just remembering these ten potential pitfalls will move you along the way toward achieving a successful transfer of ownership.
1. Not Minding the Store
The most important point to remember when selling your company is to keep it running as if you will always own it. More sales of mid-size companies fail because the underlying business takes an unforeseen turn for the worst. In a majority of these cases, the owner becomes preoccupied with the sale process and loses sight of the critical, day to day management issues. Considering that a sale can take anywhere from five to nine months, the sellers distraction from his business can be fatal to a deal, particularly during its latter stages. Late in the negotiation process, a buyers adverse reaction to negative reports of even a relatively minor problem could determine the entire transaction.
2. The Unfocused Effort
Time always works against you in a sales process. The longer a transaction takes, either because the owners are finding it difficult to make critical decisions, or potential buyers are protracting the process for their own purposes, the greater the tendency for significant problems arise. The sale process will always take some unexpected twists and turns, but in most situations, a good team of advisors and management can usually prepare contingency plans. The key is to be well prepared, confident and decisive, and to have clearly defined objectives.
3. Going-At-It-Alone Syndrome
Below is a summary of some of the potential hazards of handling the sale of your own business:
* Limiting the buyer universe: An owner will tend to focus on only one to two types of buyers, usually direct competitors or customers. Unfortunately, such an approach could very likely leave out many potential buyers not readily known by management. For example, interested buyers might be companies using the same distribution channels, but with vastly different products, or financial buyers, such as equity groups or individual investors.
* Creating bad blood: Negotiations can be a very turbulent process, causing bad feeling and bruised egos. An advisor is able to act as a buffer between the buyer and seller, playing the "bad guy" or being a scapegoat, if necessary, in order to maintain a level of decorum between the principals.
* Being caught off-guard: By limiting the direct contact between seller and buyer, an advisor can protect the seller from pressure to respond without proper consideration. Additionally, an advisor can offer a compromise during negotiations without being committed to it, to gauge the buyer's reaction. A seller negotiating directly forgoes this advantage.
* Lacking credibility: The involvement of a financial advisor in managing a professional sale process sends a clear message to potential buyers that thee will be competition; that delay, or similar tactics will be ineffective; and that pertinent information will be carefully prepared and presented.
4. Standing Up on a Roller Coaster
Selling your company can be one of life's most stressful experiences. Beside s dealing with the prospect of retirement, and with separation from a much-cared-for business, the owner must also face the inevitable scrutiny that his company and his business activities will receive from every potential buyer. The key here is to keep your emotions in check in the face of second-guessing and criticism. For some, that could mean almost minimal involvement in the process, at least until the final negotiations. For others, it could mean regular communication with those handling the sale, in order to clear up any speculation or rumors, which are often worse than the actual facts. In any case, being overemotional is likely to lead to rash decisions, based on the heat of the moment, rather than on to a rational agreement process.
5. But-The-Other-Guy-Got-More Syndrome
What another entrepreneur got for his company three years earlier, or what one large corporation paid for another, is irrelevant to your transaction. The market will determine what your company is worth today. Have your advisors do their homework to arrive at a preliminary valuation range, and then let the market do its work. Unrealistic price expectations are the quickest way to dampen buyer enthusiasm and ensure seller disappointment. Inflated valuations offer impede the seller from recognizing reasonable bids.
6. Running Off With the Highest Bidder
When it comes to ownership transfer, the highest price bid may actually be one of the worst deals for the seller. A number of critical issues could override a decisive price difference among competing bids:
* Financial wherewithal of the buyer to close the deal
* Contingent liabilities that the seller must accept for some period of time after the sale, such as those related to:
- Environmental problems,
- Pending litigation, and
- Salability of inventory.
* Contingencies or "outs" in the buyer's offer, such as due diligence, environmental audits, financing, board or parental approval
* Employment agreements for the seller and key employees, including length and level of compensation, and
* Form and timing of consideration to be paid if other than cash, such a s note, stock and earn-out.
7. Information Leaks
More than likely, you're not going to be able to keep the fact that you are selling the business a secret. It is best to avoid conflicts and protect your credit ability by being direct with employees and key customers about the news, on your own terms.
8. Favoring The Fast Track
Letting one attractive buyer get on the "fast track", far ahead of the buyer pack, will cause you to lose your greatest weapon: other bidders. The key is to build competition, to force buyers along your schedule and not to theirs. A good advisor will know when the time is right to sit down and hammer out a deal with the buyer.
9. Sparing The Bad News
No one likes to be the bearer of bad news- particularly when the news contains potentially damaging information about a company that is for sale, or reports about the company' key players. Unfortunately, the later bad news becomes public, the greater its threat to derailing the entire deal. By addressing the bad news up front, the seller can establish a strong case and avoid potentially damaging innuendo. Negative reports can certainly impact overall valuation, but cover-ups or omissions, which will undoubtly be discovered during buyer due diligence, could easily result in a broken deal that no price adjustment can repair.
10. Rushing To Market
If you are looking to maximize your company's value, overcome the disruptive effects of a sale, and cash-in when it's all over, don't expect it to happen during an overnight event. High expectations will only disappoint you. Proper positioning takes time. Critical to the successful sale of the business is the development of solid, experienced middle management, particularly if the seller will no longer be involved and running the company.
In addition, strong financial reporting systems and historical statements (preferably audited) are essential. They must support the financial data presented to potential buyers, and ensure that all the required documentation can actually be generated.
Presenting several business plans or prior years and for future years also serves to illustrate the company's value by underscoring its growth potential. As in tax planning, it is much easier to derive the maximum benefit from selling your company if you prepare for it well in advance.
Read our special reports concerning selling a business. The next step is to call us at 610-353-8244 or fill out our simple information request form, and a Business Exchange Network professional will contact you immediately.