In the last email, we discussed five of the top 10 mistakes owners make when selling their company. In this email, we will highlight five more mistakes and how owners can avoid them. As mentioned last time, owners typically make these mistakes because selling their business involves different responsibilities than running their company. With some knowledge and expert guidance, however, owners can avoid making these mistakes and complete a successful transaction (with the right buyer, of course!).
Here is part two of a two-part series on the top 10 mistakes owners make when selling their company, and how to avoid them:
Mistake #6: Not including all of the major deal terms in the letter of intent (“LOI”): The LOI’s purpose is to ensure that there is a “meeting of the minds” on valuation and a number of other key terms before the owner grants the buyer exclusivity and both parties spend significant time, money, and resources on due diligence and documentation. However, owners often neglect to negotiate all of the major deal terms up front, leaving out key terms that could have been included in the LOI. From the owner’s perspective, it is important to include these critical terms in the LOI since the owner’s negotiating leverage decreases dramatically post-LOI. The LOI is usually the “high water mark” of the deal — it generally does not get much better, so the LOI process is the best opportunity for the owner to “drive a hard bargain.”
Mistake #7: Agreeing to an exclusivity period that is too long: It is common practice for the owner to grant the buyer an exclusive negotiating period after entering into the LOI, typically 60 days or so. However, owners often unnecessarily agree to exclusivity periods that are 90 days or longer. This term is problematic because owners can get “hog-tied” if it becomes clear that the buyer is unwilling to invest the time and money to consummate the transaction or is seeking control of the transaction with the plan to renegotiate the agreed-upon terms. In the end, the owner wasted time and the opportunity to negotiate with serious buyers waiting for the long exclusivity period to run out.
Mistake #8: Not receiving anything of value in exchange for exclusivity: Granting a buyer exclusivity and taking the company off of the market is a big deal and has tremendous value for the buyer.
Before doing so, the owner should be confident that they have negotiated the best deal, have identified the right buyer, the buyer is committed to the transaction, and the buyer has the resources to close the transaction.
Mistake #9: Not saying to the buyer “I don’t have to sell”: An owner who is not under any pressure to sell can regain some of the negotiating leverage by putting the buyer on notice that they do not have to close the deal if both parties cannot negotiate commercially reasonable terms. This tactic is particularly effective post-LOI, may put the buyer “back on their heels,” and may enable the owner to achieve superior terms during the negotiations.
Mistake #10: Not being responsive to buyer information requests: Deal making is often about momentum. When owners fail to follow through on reasonable information requests in a timely manner — within a day or two, not a week or two — it can hurt the deal’s momentum. In addition, the buyer may determine that the owner is not a committed seller and may turn their attention to other opportunities.
Bonus mistake: Announcing the transaction before it closes: Owners must maintain complete confidentiality until the deal closes. The more parties that know about the transaction (including management), the more likely the public will find out. If that happens, the owner’s key customers and vendors may get spooked and consider doing business with the company’s competitors. In addition, competitors may use the disruption caused by the sale to try to steal customers. Finally, employees might become anxious about how the deal impacts them and seek other employment. Any of these factors could damage the company during the sale process, which could negatively impact the transaction and even put the transaction at risk. Any one or a combination of these outcomes could also leave the owner with a damaged company if the sale does not close.
There are many pitfalls to which owners can fall prey when selling their company, but an owner can steer clear of them if they recognize the issues. Knowledge is power and owners who avoid these mistakes will increase their chances of achieving their objectives when selling their company.
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