This is My First Time Selling My Business
For the majority of business owners, the ultimate realization of their efforts and investment in building their company occurs when they exit. That path however, can be much more challenging than most first time sellers know. Multiple studies have shown that around one-third of all negotiated small business transactions actually close, including only half of those that reach an LOI phase. This can happen for a variety of reasons. We have seen firsthand many sellers be disappointed by the ultimate offer price or the deal structure, despite initial optimism. A key factor behind this is also the company’s ability to sail through due diligence. One common reflection that business sellers have shared over the years is that they could not believe how much work was involved in the sale process. They were consistently surprised by the level of scrutiny and wished they had prepared more.
The good news is that potential cracks can be spotted well in advance. Those same cracks can be addressed. The key is to be prepared, and start early. If you are thinking about selling 2 to 3 years or more down the road, you can start prepping today. And don’t worry, if your timeline is shorter, it is not too late, it may just require more concentrated effort. The difference between selling for the value you want and having a deal collapse can come down to a number of key areas. And good news, you can control a great deal of the outcome by addressing them.
The Entrepreneurial Story and the Financial Story Don’t Match
A very common issue is that the story you are telling on the business is not backed up by the financial picture. This can happen for a few reasons, but all of them need to be addressed. Bad accounting can prevent the financials from depicting what you know to be happening in the business. For example, accounting to minimize taxes creates a very confusing first impression when the owner is preaching profitable high growth. How well do you forecast? Is your ability to forecast lacking? Is there a history of not hitting the forecasts? Do the assumptions in your forecasts have a disconnect with reality? Or is just simple flatline growth forecasted without justification? Buyers will look at historical and forecast information. Can you poke holes in your own numbers? If you can, so can a buyer. Do they truly make sense to you? When the financial story and the entrepreneurial story are complimentary to each other, due diligence is an easier, less painful process.
Missed Profit Opportunities
Profit opportunities today are directly correlated to the enterprise value of tomorrow. That may seem obvious, but buyers are going to look at historical EBITDA trends, not just current state. Finding $50,000 of profit could be worth $300,000 of value at a 6x multiple. Simply slashing costs in advance of a sale is rarely effective. Most sophisticated buyers like private equity or larger strategic companies will conduct thorough due diligence. And just relying a litany of add backs in a sale is harder to defend as well. We have seen quite often where the buyer will discount many add backs. It is so much easier to make sustainable, justifiable improvements to the bottom line. And you will make more money by doing them until that day of the sale occurs. There is no reason not to optimize the business today. Start looking through a careful lens. Where can you revisit pricing, improve margins or right size operating costs? Take meaningful action to actually adjust your EBITDA now, so you don’t have to rely on “adjusted” EBITDA during due diligence.
Running a Company and Selling at the Same Time
I will never forget what an early client of ours told me. After his business sale closed, he said “thank God the deal closed, I lost a year running the business. Had it not closed, we would have been in trouble”. The company’s pipeline and EBITDA were starting to trend downward. The process was much more taxing than expected. It is incredibly hard to successfully run a company and sell it at the same time. Start taking small steps before a sale process toward readiness. And be prepared. Deal fatigue has led to sellers remorse too many times to count. That can result in capitulating on less than ideal terms, because it still beats the alternative. That readiness is so critical.
Scalability
What is the buyer buying you for? Is it for your market reach, production capacity or your people? Perhaps it provides a vertical or horizontal integration to their business. The specific reason or reasons can vary, but they want to build off of what is in place and generate a return on investment. They do not want to come in and fix, and if they perceive they will have to, you can be assured the sale price will drop. Cracks that show up at the wrong time can be devastating. Are your systems struggling to keep up and you are unable to produce info timely or accurately? Is there a ceiling with your management team? Is fast growth masking your customer churn? Assess your business carefully, if you were going to look to grow quickly, what would hold you back? That is the first place to start. Make your business more plug and play – the quicker and easier to scale and accelerate will make it much easier to justify and defend the value you are seeking.
Inexperience and the Right Team
Business sales can be quite complex. There are risks and moving parts to ensure success prior, during and after the sale. It is critical to have the right advisors who have significant experience and expertise with M&A. This means a strong CPA, M&A attorney, wealth advisor and strategic advisors, to name a few. For example, you want an M&A attorney, not an attorney that does a number of other things and can do M&A. While many businesses do sell to strategic buyers close to them, an investment banker can be incredibly valuable in creating a market among a wide variety of buyers and maximizing value. Make sure you have the right team in place, internally and externally. This may well mean you need to upgrade from where you are today.
Look at your business through a logical, unemotional lens. Rely on insights from parties outside the business. Your bank can be a great source, as that is a light due diligence process, but could illuminate some of the same issues a buyer would struggle with. Make sure you have the team in place to help you illuminate potential issues and opportunities and also be able to be part of the solution to fix them. That team will also need to support you prepping for and supporting buyer due diligence. Start today.
