Selling a business is challenging. From vetting potential buyers to preparing financial statements to keeping negotiations on track — all while running your company — there’s a lot that can go wrong. In fact, almost no detail is too big or too small to affect the eventual outcome of merger and acquisition (M&A) deals. However, you can reduce the odds of a mistake by knowing where similar transactions have gone astray.
“It’s important to talk to owners who have successfully completed sale transactions and to work with experienced M&A advisers,” says Brian Reed, partner in Transaction Advisory Services at Weaver.
Smart Business spoke with Reed about common M&A mistakes and key items to resolve before closing a deal.
How might sellers hurt their chances before putting their business on the market?
You risk a letdown when you make overly optimistic future earnings projections or put too much weight on variable measurements, such as the sale prices of similar companies in stronger M&A markets. If you won’t budge from an unrealistic sale price, you could drive away an appealing buyer.
Work with a professional adviser to assess your company’s value as well as estimate an offering price the market can support. The two may not match because the price depends on contemporary economic, M&A market and sector conditions.
Where does timing factor into this?
Other critical seller mistakes revolve around timing, whether internal or external. For example, selling at the wrong time, at the end of a market cycle, could mean fewer buyers and possibly lower offers. If your sector has experienced a recent wave of M&A deals, the buyer base could be depleted, and you may want to hold off.
Sometimes sales are spurred by internal circumstances, such as the retirement of a founding owner, but these situations shouldn’t rush the sale. If your company is not ready for the market, consider appointing an interim head to make preparations and screen potential buyers.
Sellers, particularly those selling for the first time, often greatly underestimate the amount of work and hours it takes to prepare for sale. Have you allocated enough time to implement strategies to maximize your sale’s value? Is your company ready to promptly and accurately respond to hundreds of specific buyer requests? If you haven’t assembled a team with the time and resources to handle these requests, it could bring your potential deal to a standstill and deter otherwise interested buyers.
How might housekeeping impact deals?
Housekeeping issues aren’t trivial. They include essential tasks such as ensuring that contracts and legal obligations are in order. Some items that can trip companies up are:
• Poor accounting. If your financial statements and records are not properly organized and presented, it reflects poorly on your management, and the due diligence process will likely take longer. Sloppy accounting errors could mean tax or legal issues after the deal closes.
• Neglecting key players. Buyers want to know that key employees will stay onboard once the sale is completed. Make sure your top performers are offered financial and other incentives to stay.
• Locking in contracts. Don’t renew an expensive vendor contract as you’re about to transfer ownership. Buyers don’t like long-term contracts they didn’t negotiate, particularly if they’ll be penalized for breaking them. Negotiate short-term contracts or push for favorable terms.
What are some common loose ends to watch for and resolve?
Leaving loose ends hanging won’t endear you to your buyer, as they could hinder integration and future profitability. Some common unresolved internal issues involve:
• Minority interests. Buying out minority investors or shareholders before a sale means the buyer won’t need to deal with their demands later.
• Employee controversies. An integration team doesn’t want to deal with open legal issues, for example, while trying to build a new culture.
• Copyright confusion. Make sure all patents, copyrights, trademarks and other intellectual property holdings are in order. If you’ve failed to verify and document ownership, you may risk the deal’s value.
Brian Reed is a partner in Transaction Advisory Services at Weaver. Reach him at (972) 448-6936 or [email protected]
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