By Gary Miller – Managing Director, Consulting Division, SDR Ventures
Many business owners are jumping on the “band wagon” to sell their companies, trying to take advantage of the current “hot” market and “frothy” multiples being paid by buyers. With the Baby Boomer tsunami, more businesses are for sale today than at any other point in history. This trend creates a competitive environment among sellers and leads buyers to look more closely at the “quality” and “price value” relationship of any potential acquisition.
For some time now, due to strong earnings, low interest rates and favorable capital markets, many buyers want to grow their businesses more rapidly through acquisitions in addition to organic growth.
However, 80 percent of business owners who put their businesses up for sale never close the transaction. From years of observation, I have found that most deals “fall apart” (fail to close) for eight basic reasons.
First, too high value expectations.
The number one reason deals fail to close is a seller’s unrealistic valuation expectations. Many business owners read and hear about companies or competitors selling their companies for very high valuations. Therefore, they believe that their businesses are worth the same.
Second, unclear story elements.
Business owners need to think like buyers. Attracting a buyer is like preparing for a beauty contest. Companies that “show best” win “first.” Often, because of poor strategic planning, the business owner cannot articulate clearly the company’s competitive advantages, its growth opportunities, its revenue potential, and its ability to produce significant returns on invested capital.
Third, quality of earnings.
Audited financial statements confirm financial accuracy and help validate forecasted performance. Lack of clarity and visibility regarding key business drivers, sales pipeline backlogs, back office operations, and the consistency of growth and earnings inhibit a buyer’s enthusiasm.
Fourth, length of time.
Every deal has its own momentum and a life of its own. Recognizing the “ebb and flow” of the deal momentum is critical to deal success. Therefore, time is the enemy of all deals. As the deal process drags on, both buyers and sellers start to lose interest.
Fifth, material changes.
Material changes in the business’s operations can occur at any time. While these changes may be completely out of the seller’s control (e.g., recession, loss of a large client, loss of a key employee,) often these changes can stop a deal from closing. However, if a material change occurs, the seller must disclose it promptly and fully to the potential buyer. Nothing will destroy a buyer’s trust quicker than the seller failing to be “up front” about a material change in the business.
Sixth, renegotiating terms of the deal.
Renegotiating the terms, conditions, structure, representations and warranties of a “settled deal” can be a deal killer. At the very least, back-tracking deal components that have been previously agreed too kills deal momentum, adds time and causes “deal fatigue.” Further, it fosters distrust and can call into question all other components of the deal structure previously negotiated.
Seventh, reaching for the last dollar.
It is completely understandable that sellers who have put everything into their businesses want to get every dollar they can out of their businesses. Often, the owner traps himself/herself mentally by fixating on a specific price for the company. Multi-million dollar deals have been lost over a few thousand dollars. I recommend to clients that they should examine all components of the deal’s structure –not just the final offering price.
Eighth, inadequate advisors.
Selecting a quality “deal team” is critical to “deal success.” In my experience, business owners are very good at building successful businesses, but often stumble when seeking to monetize them in some form of exit strategy. Selling a business is a once-in-a-lifetime event for most business owners. Most owners have never sold a business and do not have the skills to complete a deal on their own.
Moreover, research indicates that owners who “go it alone” more often than not will “leave money on the table” and fail to obtain the best terms and conditions for the transaction.
In addition, I believe the five key members of a successful deal team are:
- First, an experienced mergers and acquisitions consultant to lead the transaction team.
- Second, a skilled wealth management firm to help owners preserve their proceeds and to minimize tax obligations from the sale of the company.
- Third, a law firm that has significant transaction experience and expertise.
- Fourth, an accounting firm familiar with the tax implications of various deal structures.
- Fifth, a strong investment banking firm with deep industry experience, solid valuation expertise, and keen negotiating and closing skills to get the deal done.
Gary Miller is managing director of SDR Ventures Inc.’s consulting division, where he helps middle-market business owners prepare to raise capital, sell their businesses or buy companies, and develop strategic business plans. He can be reached at 720-221-9220 or firstname.lastname@example.org.
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