Theodore Roosevelt said it best: “Nothing worth having comes easy.” Selling your company is, obviously, a worthwhile endeavor, but it is never an easy one. The sale of a business can be accompanied by tumultuous negotiations, stormy setbacks, and other potential pitfalls. And most owners, especially those who have never sold a company before, underestimate the months-long “roller coaster ride” involved.
In our last email, we covered 5 of the most common misconceptions owners have about selling their companies. In this email, we will discuss five additional misconceptions and truths about what owners can actually expect during the sale process:
Misconception #6: The time between when an owner decides to sell their company and when the transaction closes is not very long.
Truth: To maximize the company’s sale value, it may take 1-2 years (or longer) to prepare it for sale. Rushing to market without proper preparation can be costly as buyers will discount the value of a company that has not addressed the fundamental factors that impact valuation including earnings, accounting, customers, vendors, management and employees, other company-specific issues, etc. In addition, the actual steps to sell a company – buyer identification, distributing information, negotiating an LOI, due diligence, documentation, etc. – add an additional 6-12 months to the timeline. Even if the company is prepared, the typical time to sell a company is 6-12 months.
Misconception #7: Everything will be “smooth sailing” during the sale process.
Truth: In “A Midsummer Night’s Dream,” William Shakespeare wrote: “the course of true love never did run smooth.” If the Bard were alive today, he might pen similar words to describe the sale of a company: “the course of selling a business never does run smooth.” To be sure, owners can always expect choppy waters when selling their business: diligence issues may arise, company operating results may not sustain during the process, constituents may not be thrilled about the sale, and terms may not be easily agreed upon. In short, owners should batten down the hatches and expect to encounter stormy seas during the sale process.
Misconception #8: The buyer will propose fair price and terms.
Truth: Even if the owner has a good relationship with the prospective buyer — even if that person is their lifelong best friend or a family member — owners still need to have their “guard up” during the sale process. After all, the sale of a company is a zero sum game. If the buyer wins a point, then the seller loses on that point and vice versa. The buyer, as is the seller, is (obviously) trying to negotiate the best deal for themselves. Period.
Misconception #9: I can walk away from the company as soon as the deal closes.
Truth: Not likely. Even after an owner sells their business, they may need to remain involved for at least a few months, or longer, to ensure a smooth transition of the company to the buyer. The owner simply knows too much about the intricacies of the business to walk away concurrently with the sale. In addition, if a portion of the purchase price is contingent on the future, it is in the best interests of the owner to remain involved to influence the contingent portion of the purchase price. Unless the owner has a strong management team that is remaining with the company or the owner has been an absentee owner, the owner should be prepared to tack on additional months (or even years) to the exit timeline.
Misconception #10: All constituents will embrace the deal.
Truth: “That’s a good one boss!” While the owner would like to believe that everyone involved — customers, vendors, employees, landlords, etc. — will understand and be supportive of the transaction, typically, one or more of the constituents will have some issue with it. For sure, the first reaction among all constituents will be “How does this affect me?” The owner should be prepared to “sweet talk” the constituents to assuage their concerns.
Bonus misconception: Nothing will change after the owner and buyer sign the letter of intent (LOI).
Truth: Well actually, that all depends on the integrity of the buyer, the results of diligence, and a myriad of other scenarios after the LOI has been signed. The signing of the LOI is the “high watermark of the deal,” meaning that the deal does not typically improve for the owner after signing the LOI. All sorts of unforeseen issues could arise — there may be diligence issues, the company could lose a customer, its financial results could weaken, it could be served with a product liability lawsuit, and on and on. LOIs are (usually) signed with the best of intentions, but, events can occur that result in the buyer proposing a change in the transaction.
To reiterate, selling a company is not easy, but owners who understand the potential issues that can arise and go into a deal with “eyes wide open” are more likely to sell on their terms and close a successful transaction that is both in line with their expectations and accomplishes their goals and objectives.
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