9.5 min read
Selling a business may be the largest transaction a leader will undertake, and the right approach can make a fundamental difference between success and failure. Mistakes can be costly, and here we present the most common slip-ups and how to avoid them.
1. Failing to prepare the business exit strategy
Many owners see company value simply as a biproduct of earnings. However, the quality of earnings and your establishment similarly have an impact on value. Volatile cash flow, over-dependence on key staff, weak information and poor governance all increase risk and limit forecast yield, so that even a motivated, strategic buyer will downgrade the value. Prior to sale, a ‘vendor assist’ exercise – seller due diligence and a business review, will help you secure a better price. The process can be delegated, and the preparation detail makes good business sense. The costs are far offset by the return and improvements in the business model. A third party ‘check’ also helps with objectivity.
2. Not researching all exit options
There is a myriad of sale options, recognising that every business, business model and shareholder team is different in its aspirations, outlooks, and approach. A trade sale might seem easy, but what about private equity, or a sale to all the employees by way of an Employee Ownership Trust? Research on timing and type of exit is crucial – it is no good having preconceptions or simply watching the headlines and hoping that will work for you. The stakes are high – check on both timing, type of transaction and preparation. Yes, this takes time, but leadership is about being ahead of the game and a key aspect of value is creating a team-driven business model so that you have the time to understand the right business and shareholder direction.
3. Selecting the wrong advisors
Many advisors are biased towards certain deal structures and in some cases, heavy upfront fees. They sell to you rather than advise, which is fatal and creates many misconceptions. While an optimistic advisor is critical to maximising an auction, the offers process itself will secure the best value in an auction. It is vital that the advisor gives you the detailed facts and does not simply agree with you to win the mandate. It is also important to choose an advisor who can provide advice on the full spectrum of exit options so that the market can best help you decide, and who has a strong track record in your sector. Additionally, your advisor should take the time to listen carefully to your objectives, understands the business model and is both highly expert and creative in delivering you the best solution. In any highly technical process, pitfalls can be costly, and a quality intermediary will have significant expertise and experience in reducing these challenges.
4. Having poor data and presentation
Professionalism and strong presentation are important value drivers and the same applies when it comes to presenting the actual business for sale. A crafted confidential information memorandum (“CIM”) or investment memorandum is vital. This needs to position the opportunity in the best light whilst getting across succinctly the key information. Today, a CIM will also be backed by a high-quality marketing data room.
The goal is to get the potential acquirer informed and interested so that they understand the opportunity and the unique potential it affords so that you can quickly determine their level of interest. A “no” saves material time, so you can concentrate on selling to interested parties. A “yes” means you can focus on researching the benefits to the right party. Buyers will be influenced by presentation and accuracy, with the balance of information versus presentation well-honed. Headlines rather than lots of details with good visual impact and aesthetics together with a well-prepared marketing data room have greater impact. Historic, current and forecasted real-time financials and clear breakdowns are essential.
5. Failing to diligently check buyers
Not carrying out reverse due diligence. Many sellers make the mistake of being charmed by the first buyer with a decent ‘on paper’ price, only to find that the deal is stretched out and then later the price eroded as seller fatigue kicks in. Therefore, it is vital to fully check out the buyer’s covenant, transaction experience, and capability before agreeing to any exclusivity. Ideally, exclusivity will have a ‘subject to reasonable progress’ benchmark written into the contract.
6. Fighting with buyers over small points
… and failing to win the big ones.
7. Lack of clarity on post-deal strategy
A change of ownership is a change of culture. Buy-side due diligence should also be about forming a clear business plan and sellers need to insist on transparency if they are to retain an involvement. Too often the legacy and the team are adversely affected post-completion due to a lack of a clearly articulated plan from the buyers. With transactions that have earn-outs or equity rollovers, this can materially affect the value gained in the long term from the sale.
8. Accepting sweetheart deals
The direct approach may be the best deal, but it also may not be. Buyers will always tell you their offer is the best option. They will sell to you, charm you and make sure you feel good so that they win the bid at every step. Expert advice is critical. A good advisor will tell you if you have a good deal as they will be busy and not biased towards winning an engagement. A process with a competitive environment is the best way to determine value.
9. Not having a BATNA
BATNA stands for ‘best alternative to a negotiated agreement’. When agreeing to a deal, people want them to happen – they become emotionally connected with the outcome and are motivated to find solutions to achieve the goal. There is nothing inherently wrong with this, but it is better to look at and have alternatives if the terms do not work. Understanding all your options, including timing, and having alternatives are critical in case you do need to walk away.
10. Not keeping it simple
Most corporate advisors eat jargon for breakfast, or is that argon, the gas? It is not their fault. There are so many terms and definitions in mergers and acquisitions, each with a different nuance, that even seasoned operators can miss key points through misinterpretation. As a rule, however, if any aspect is long-winded, or too full of jargon, do not do it – in particular, “heads of terms” need to be in broad layman’s terms with plenty of clarification and worked examples. The ‘heads of terms’ provide the framework and understanding between the parties before the later, definitive terms at completion and a simple robust foundation at this stage of a deal is essential. Each point should be clear, concise, and understandable.
11. Talking too much
The gift of selling can be something of a curse in mergers and acquisitions and too often make you look too central to the operation of the business. Let the numbers and business model, as well as the opportunity, do the talking. Ask buyers lots of questions and work out how to influence not persuade.
What should I do next?
Join the discussion and register for our next webinar. We are live on 15th July 2021 with ” Exit Strategies – 11 worst mistakes” Register here https://us02web.zoom.us/webinar/register/8416214222062/WN_GK3EbHcIQKOUjXvkIv7FjQ alternatively contact us on +44(0)20 7788 8250, or email https://avondale.co.uk/contact-avondale/ for further information.