By Stan Bailey, Chairman & Founder
Many business owners say that they want to exit their businesses within the next 3-5 years but fail to meet this goal. The primary reason is the owners’ failure to establish a process to prepare the company for this major strategic event, which often takes 2-3 years to plan and execute well.
This leads to a number of self-inflicted “deal killers” when the owner is ready to pull the sale trigger, conditions that destroy a company’s salability if they are left undetected and unresolved until the sale process starts. Here are my top “deal killers”:
1. Owner expectation of selling the business quickly without preparation. – In my several decades of M&A deals, I’ve yet to represent a seller who requires no preparation for a transaction.
2. Failure to know your company’s value. – Over 90% of company owners don’t know their current market value. Therefore, they don’t know their company’s traits that are attractive to professional and strategic investors, and enhance purchase pricing.
3. Focus on top-line sale price only. – Few M&A deals are all cash at closing, at or above current market values, with no multi-year hooks for the former owner. In general terms, buyers pay a market-multiple of EBITDA for historical performance and an earn-out or contingent payment for growth in future sales and earnings. Buyers often want the former owners’ skin in the game for several years after closing with a portion of the purchase price in the form of a seller note.
4. Failure to preserve a company’s most valuable asset – its people. Retaining key employees post-sale is critical to a successful business sale. Most buyers view key employees as essential and may not be interested in acquiring a company if they leave. Owners forget how their exits will cause unrest in the employee ranks. It’s essential to retain key employees through employment agreements, non-qualified deferred compensation plans, stay-bonus plans, and non-solicitation agreements to keep key employees after closing.
5. Believing that you can negotiate alone. – Few successful owners have the experience of multiple M&A transactions during their careers. Representing yourself will ensure a high risk of deal failure, generate a lower purchase price and extend the sale process timeframe. Build a top-flight deal team that will help you navigate the nuances of a business sale. The returns on your investment in the strongest possible deal team can be exponential.
6. Believing that pre-sale due diligence isn’t worth the time, effort or cost. Pre-sale due diligence can be costly, but foregoing it can be devastating. Buyers have high expectations when paying a high price for your business, so any unaddressed flaws in your company can damage its value to the buyer or, worse, kill the sale. Getting out in front of any problems that your company has will eliminate the risk that the buyer finds a flaw in your business that you didn’t recognize. Engage your deal team to perform a pre-sale due diligence before you go to market. An ounce of prevention is worth a pound of cure.
7. Seller’s remorse. Selling your company is like losing a family member. Emotions can lead to cold feet, especially toward the end of the sale process. Talk to your advisors, family, and other owners about your post-exit goals.
To avoid these pitfalls, I suggest working with planning-based advisors experienced in helping owners protect and transfer their business at maximum value.
Stan Bailey is the Founder and Chairman of Ironline Advisors, a lower middle-market M&A advisory firm headquartered in Birmingham, Alabama with offices in Dallas, Texas and Lexington, Kentucky. For the past twenty-seven years, he has completed dozens of M&A transactions for corporations, private equity firms and his own investment portfolio.
Ironline Advisors provides business transition services, including strategic value maximization, generational business transfer, and M&A advisory to lower middle-market, privately-held companies. With years of business and transaction experience, Ironline’ s team of professional advisors has senior management, operations and transaction expertise to assist their clients with transition-related activities. For more information, visit www.Ironlineadvisors.com or contact Ironline at (205) 873-9597.
