Selling your company is easy, right? Wrong! Selling a business is a complex process with a lot of moving parts. If the owner has never sold a business before, they often have misconceptions about the level of time, effort, and attention it takes to sell their company and what they actually need to do to complete a deal that achieves their objectives.
Below are 5 of the most common misconceptions owners have about selling their business. We will cover 5 more common misconceptions in part 2:
Misconception #1: Anyone who calls is an interested/capable buyer.
Truth: Hold the phone. As we mentioned in a prior email, the buyer that motivates a sale process may not actually be the best buyer after all. Even though they made the call to the owner, many of these callers may not even know if they want to acquire the company until they review some information. Consummating a transaction is a “three-legged stool”, where the “right” buyer must be motivated, knowledgeable, and have the resources to complete the deal. If any one of these “legs” is missing, the buyer is likely unqualified and, therefore, not worth the owner’s consideration.
The caller may be motivated, otherwise they would not have initiated the call; however, they likely are not that knowledgeable about the company other than having a broad understanding about the company’s business. Finally, the owner’s and buyer’s idea of “resources” (and valuation) could be vastly different.
In addition, it is worth noting that the callers, directly or on behalf of a client, are trying to create “proprietary deal flow,” which means they want to acquire the company in a non-competitive process. From the owner’s perspective, “non-competitive” often means lower price, inferior terms, and a free option on the company for the party that initiates the discussions.
Misconception #2: All I have to do is provide the buyer with a bunch of information and they will make a fair offer for my company.
Truth: First, the last thing an owner should do is “willy-nilly” share a bunch of confidential company information with a would-be buyer even if both parties have signed a non-disclosure agreement (NDA). The onus is on the owner to educate the buyer why their company is valuable and about the unique characteristics of the company that make it valuable. Without this effort, the buyer will not appreciate the value of the company and will likely make a disappointing offer for the company.
Misconception #3: I do not need to plan in advance to sell my company.
Truth: Nothing could be further from the truth. It takes months or years, to prepare a company for a sale. And the sale process itself is complex — it will take many grueling months for a transaction to close, even for the most well-prepared owners. Lack of preparation generally means that critical actions and decisions will need to be made under the bright lights of the transaction rather than at a more leisurely, lower-stress pace. In addition, an owner who has been steadily preparing their company for sale is more likely to be able to capitalize on the “right opportunity” when it comes along, whether in connection with a process or as a result of an unexpected inquiry.
Misconception #4: Transaction fees are a waste of money.
Truth: As the old saying goes, sometimes you have to spend money to make money. Mistakes made during a sale can be extremely costly, and as we have written many times before, selling their company is often outside of the owner’s “comfort zone.” The benefits of hiring knowledgeable professionals will exceed the costs associated with hiring those professionals through improved price, terms, or both. In addition, working with specialists puts all parties on the same page regarding market price and terms, which generally helps the deal proceed more smoothly for both the buyer and the seller.
Misconception #5: GAAP is equal to Quality of Earnings (QOE).
Truth: Generally Accepted Accounting Principles (GAAP) and Quality of Earnings (QOE) are NOT the same thing. As we wrote in a previous email, GAAP precisely measures the actual results of the company, but it does not adjust for owner expenses that the buyer may not incur going forward or other one-time expenses that are worthy of further consideration such as non-recurring employee costs, unusual professional fees, or large, one-time bad debts. It is important to highlight these items for a buyer so that they are knowledgeable about the company’s financial results in order to value the company appropriately and make an informed offer.
Owners often believe that selling their company is a snap. However, just as it takes time and effort to build a business, the same level of care and diligence is required to sell it. By understanding these common misconceptions and the realities of selling their business, owners can take the steps necessary to consummate a smooth, successful exit.
We will discuss 5 more misconceptions and truths for owners considering a sale of their company in Part 2.
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