4 Common Pitfalls to Avoid When Selling Your Business [PODCAST]
Entrepreneurs need to be careful to approach their business sale in a way that maximizes their return. The process is complex and can be difficult to navigate for the first time. Recently, Joe Hellman sat down with investment banker Sam Matlin, an M&A advisor with Capstone Partners, on The Transaction Abstract podcast to discuss common issues and how to avoid them when selling a business.
Understanding the Pitfalls of the Sales Process
Sam noted he has seen distinct trends and themes throughout his career in terms of things to avoid. Many of the potential issues are especially acute for entrepreneurs selling their business for the first time. The key pitfalls he identified are:
- Waiting Too Long to Prepare for Exit of the Business
Although about 95% of business owners ultimately want a profitable exit, many of them do not prepare until it is already time to plan a transaction. A transaction can take months or even years, and starting appropriate preparation early accelerates the timeframe. In that sense, it is similar to selling a house.
One point that comes up frequently is a failure to prepare the company’s financials. It is easy for even experienced business owners to underestimate how much work goes into the preparation phase. They may need to make big changes to make the organization attractive to investors, including:
- Putting the right management team in place
- Developing a strong strategic vision
- Having sound operations and KPIs
Without an audit or review, problems with taxes or compensation structure can fly under the radar until they are already affecting the business valuation. Sam and Joe agreed that in the run-up to exiting, these and other important conversations should take place 2-5 years in advance.
When the process does not begin early enough, business owners can be tempted to spend a lot of time talking about a transaction and less time pursuing it. It is vital to have the right M&A team, plus tax and legal representation, but action is paramount. Many owners worry about confidentiality, being “found out” by the competition and employees – but this is not a concern in practice, as all matters are covered by strict NDAs.
- Navigating the Array of Buyers
Once the process is actually underway, entrepreneurs can face challenges attracting and selecting the right buyer. In the past, the process was simpler: You would typically sell to a strategic buyer or perhaps a private equity buyer. Now, the landscape is much more diverse.
PE-backed strategic buyers, family offices, and even SPACs (Special Purpose Acquisition Company) are responsible for a growing proportion of buyers. Within each category, there are lots of different “flavors.” Sellers need to go beyond valuation and ask questions about cultural fit and how the future will look under a partnership.
Sam encourages sellers to treat the interview as a chance to get to know the potential partner – and to ask the right questions without being timid. This can be challenging since emotions tend to run high and there may not be much time to get to know people. Interviews should be seen as part of due diligence.
- Not Embracing the Deal
All deals are hard, and the process can be exhausting for owners and their teams. The most challenging steps come at the end and are physically and emotionally grueling. To avoid frustration later on, start by understanding the process, knowing what is coming, and accepting it for what it is.
Buyers also have tough times during deals, and it is essential to avoid taking shortcuts. Although the process takes a toll, cooler heads get better results. In M&A advisory, the slog is known as “deal fatigue.” It can kill deals even when financials and strategy all point in the right direction.
With that in mind, one of the most important roles of the M&A advisory team is to make sure the sellers know as soon as possible exactly what they are getting into. Advisors work in your corner and do all they can, but the nature of the process is always demanding.
- Poor Timing
Long-term thinking helps business owners act at the right time to protect their interests. Investors look for a history of growth combined with significant growth potential. Owners need to realize that as they focus on selling, other priorities – like replacing a C-suite executive or introducing enterprise software – will fall by the wayside, in part because they can disrupt investors’ analysis of the business. Those value-added projects and initiatives should be completed before going to market.
Redpath and Company
Redpath and Company helps clients make more informed decisions that contribute to their financial well-being by providing proactive, innovative, and value-driven CPA and advisory services for closely-held businesses, private equity, government entities, and nonprofit organizations. Core commercial industries served include manufacturing and distribution; construction, real estate, and engineering; and technology. Areas of service expertise include audit and assurance; personal, business, and international tax; state and local tax; sales and use tax; and succession and estate planning. Redpath also guides clients throughout the entire business life cycle with performance optimization and process improvement; M&A advisory, including corporate and deal strategy, due diligence, financial modeling, and M&A integration; accounting and management outsourcing; and valuations. The firm was founded in 1971 and is employee owned (ESOP). With offices located in St. Paul and White Bear Lake, Minnesota, the firm ranks as one of the top CPA and advisory firms in Minnesota. Redpath is a member of HLB International, a global network of independent advisory and accounting firms. For more information, visit www.redpathcpas.com.