The Pitfalls of Selling Your Business

Have you ever wondered why an estimated 30% of businesses under $100MM that are saleable actually get sold? A few of the reasons we have encountered are listed below.

A business is not difficult to sell if you have been preparing for last 10 years. If you were to look at the chart below, experienced professionals will tell you that the average sale time of a middle market business is about 18 months (Step 3). That is pure sale time, this is preceded by an optimization phase where we build value to set your company up for the best sale (Step 2). Starting with the analysis phase of “where we are now” (Step 1) we will look at questions like what are the tax implications of selling your company in its current legal format? How is the IRS going to review the value? What can be done to maximize the value? Do you have a compounded growth rate exceeding 6%? Do you know what your EBITDA is?

The biggest reason for a failure to close is that the sellers do not have a clear idea of the value of their business. Many owners will base their value of the business on feelings based on hearsay and rumors of what they understand what other owners claim they received. The challenge becomes in how to translate those feelingsabout value ajustifiablevaluationbased on the performance of the business.Often the information from other owners is inflated to make them look like a successful deal maker. We have seen numerous examples where sellers turned downfull valuation offers only to find that they were forced to selltheir business for a lower price a year or two later after the business turned down due to competitive pressures and the economy.

Another reason is waiting for a buyer to show up and not hiring appropriate professionals. We are often asked by sellers to refer to them a buyer “who is willing to pay a full price”. Full price here again is what the seller feels that the value is. When this single bidder shows up they immediately sense that the seller has not hired the appropriate professionals and begin to suspect that they are the only bidder. At that point they bid a reasonable price and then renegotiate a much lower price before or at closing. In many cases the seller will often spend a lot of money to get to a closing only to find that the buyer holds up a check for a lot less money and says “take it or leave it”. This process can be exacerbated by hiring an attorney who is not experienced in M&A, who then may ultimately recommend a course of action that is not in the seller’sbest interest. We are proactive about involving the right necessaryother experts to insure that our client has the appropriate guidance and is surrounded by people with your best interest in mind to make a closing possible.

Often a seller is not familiar with the structure of a sale transaction. We were talking to a business owner who was interested in selling his small manufacturing business for 2x – 3x cash flow, which is a typical multiple for this type of business. He then agreed that this multiple was acceptable for the business and then asked us if he could remove the working capital from the business. We explained that a buyer on a multiple basis would expect to purchase a going concern business with adequate working capital to operate the business. He decided not to sell believing that the working capital should be separated from the business and the buyer should bring in his own funding. Sellers should be aware that theywill generallyreceive only 50% – 70% in cash with the remainder paid over time. They will typically be required to remain in the business from 2-5 years after closing.

Surprises are never a good thing and can be a major source of deal failure. The financials should be preferably reviewed or auditedby a CPA firm to provide comfort to the buyer that the revenues and expenses are properly accounted for. Any issues that may have a negative impact on the business should be disclosed as soon as possible in the process. Anything that the buyer finds in diligence that has not been disclosed will have an impact on the valuation and raise the question “what else are they not telling me about”. Once the information is discovered it may lead to a revision in the purchase price and potentially become a deal killer.

The best way to avoid these pitfalls is for you to become educated on the sale process. Hire a professional to value your business based on other transactions in your industry. He can also evaluate your business looking at it from the prospective of a buyer to identify strengths and issues. Every $100,000 of savings or additional revenue can turn into $400,000 to $600,000 of additional value.

Author:. Introduction

Born, raised and educated in The Kingdom of the Netherlands, John Stolk has developed a unique style Executive Counsellor Service, combining both US and European best practices.


Executive Summary

Highly experienced and accomplished Senior Executive with 20+ years of international experience successfully growing businesses and demonstrated leadership skills. Credited for exceptional ability in business leading development,...

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