Owners are great at running their business. When they are ready to sell their business though, owners are prone to common mistakes since selling their company is often new, uncharted territory, and certainly not what they do every day. These mistakes can be costly, waste both the owner’s and the buyer’s time and money, and potentially result in a busted deal; however, many of these mistakes are within the owner’s control and are avoidable.
Here is part one of a two-part series on the top 10 mistakes business owners make when selling their companies, and how to avoid them:
Mistake #1: Not entering into a non-disclosure agreement (NDA) or entering into an NDA that is not in the owner’s best interests: Often, owners will get caught up in the glamour of deal making and either skip over the NDA process or let the buyer tender the NDA. Here is the problem: buyer-tendered NDAs are friendly to the buyer, not the owner. Buyer tendered NDAs may not include key terms that an owner would want or need, i.e., a sufficient term – 2 to 3 years (rather than 1 year), an employee non-solicit provision, among others. Owners should consider tendering the NDA or confirm that the buyer’s NDA includes the necessary terms.
Mistake #2: Providing information without creating a pitch or providing context: Owners often forward financial statements or other primary information to buyers without any context and/or without supporting it with a carefully crafted pitch. Without explanation, a potential buyer may not understand or may be confused by certain information: why isn’t the company as profitable as expected; what are these unusual income statement items; what are these balance sheet assets/liabilities? More specifically, it must be clear what (quality of) earnings and cash flow are being offered for sale, and what balance sheet is being offered to support the earnings and cash flow. In the most severe case, the lack of context could create an irreparable negative perception of the company that derails the deal. In short, it is not sufficient just to share information about the company — owners must provide the “story” behind the information.
Mistake #3: Sharing too much information before determining if the buyer is serious or has the resources to buy the company:
Consummating a transaction is a “three-legged stool:” The buyer must be motivated, knowledgeable, and have the resources to complete the deal. If any one of these three “legs” is missing, it is unlikely that the deal will close. The owner must confirm that the buyer meets these three criteria early in the discussions before spending too much time with an unqualified buyer.
Mistake #4: Allowing the buyer to do anything they want during due diligence: Once engaged with a potential buyer, owners may make the mistake of giving the buyer “carte blanche” to undertake any due diligence at any time. Ultimately, the buyer should be allowed to undertake a complete and thorough due diligence; however, actions need to be staged based on the progress of the transaction. For example, the buyer should not be allowed to talk with employees, customers, or vendors or review intellectual property until the transaction has a high, if not virtual, certainty of closing. After all, if the transaction does not close, the owner cannot be left with a damaged asset. Until the end, the owner must remain in control of the company and continue to protect the confidentiality of its assets and employees.
Mistake #5: Getting too friendly with the buyer and not checking out the buyer’s integrity early in the discussions: Becoming too friendly with a potential buyer is dangerous on multiple levels. First, it makes negotiations more challenging because the “friendship” makes it difficult, if not impossible, to have the tough conversations buyers and sellers typically have during the process. Moreover, the owner should investigate the buyer’s background before getting too far into the deal. The integrity of the buyer (and seller) is an essential part of deal making, and even though it takes much more to complete a transaction, the owner should feel confident that they could do the deal on a “handshake” and be able to take the buyer at their word.
These are five of the top 10 mistakes owners often make during the sale process. However, with knowledge and foresight, they can easily be avoided, giving the owner a better chance to achieve their objectives. In the next email, we will highlight five more mistakes that owners often make when selling their business and discuss how to avoid them to increase the likelihood of achieving a successful sale.
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