For every large public company merger & acquisition, there are hundreds of small and middle-market M&A transactions taking place. While some business owners have properly prepared for these potentially life-altering mergers & acquisitions transactions, our experience indicates most have not.
Exit planning experts advise entrepreneurs to start planning for the eventual exit from their business the day they start their company. While such advice may seem premature, proper exit planning and expert transaction execution can have a huge impact on the net proceeds received from the business sale and an owner’s happiness in retirement.
The information that follows will help you avoid the pain of leaving what could be millions of dollars on the table. The eight critical mistakes to avoid are:
Failure To Address Your Personal Goals
Well in advance of a desired exit date, business owners should address questions such as: What are my specific retirement goals? Will I have enough money to meet my post sale lifestyle and retirement goals (spending, charity and legacy, etc.)? Should I change my lifestyle prior to the sale of the business? What estate and trust strategies should I consider? How should I invest my post sale financial assets? Answers to these questions should be shared with the owner’s financial advisory team (merger & acquisition advisor, tax accountant, estate attorney, transaction attorney, and wealth advisor).
Selling The Business Yourself
The sale of a business in a mergers & acquisitions transaction is a complex process wrought with minefields. Most owners don’t have the expertise to confidentially position and market their business to a diverse group of qualified merger & acquisition buyers (strategic buyers, industry buyers, private equity groups, investor groups, foreign buyers and hedge funds, etc.) Another common mistake is negotiating the deal himself/herself. Negotiations can get contentious potentially leading to bad feelings between the M&A buyer and seller. Finally, the financial performance of the company often suffers because the owner is immersed in every aspect of the mergers & acquisitions sale process. If business performance diminishes, it inevitably leads to a downward adjustment of the sale price of the business at the last moment.
Talking With Only One Buyer
Negotiating directly with one M&A buyer “eliminates” an owner’s leverage in the merger & acquisition transaction. It can be one of the biggest mistakes a business owner makes. Hiring an experienced Merger and Acquisition advisor will increase the likelihood the owner will arrive at the most financially favorable M&A transaction possible. How so you say? By creating a competitive bidding environment among multiple potential M&A buyers leverage is created to maximize the overall sales price, thus providing the owner with peace of mind the business was sold for fair market value.
Trying To Sell At The Top
Timing is critical! Just ask the hundreds of business owners that wish they had sold their company one year ago. Sellers who try to pick the top of their market cycle all too often end up missing it and thus lose their chance to obtain a top selling price. Shrewd, professional M&A buyers typically will not pay a significant premium for businesses near or at the perceived top of the market cycle and will attempt to structure a transaction to minimize their financial risk. Business owners are well advised to initiate the mergers & acquisitions process when they think there is a year or two of revenue and profit growth left, thus giving M&A buyers comfort that they will be able to continue to grow the business.
Not Relinquishing The Reigns
M&A buyers, especially financial buyers, place a premium on companies with a talented and committed management team. Companies with owners who make most of the operational decisions themselves, and who are integral to ongoing customer and vendor relationships, are perceived as riskier and thus not as attractive to M&A buyers.
Failing To Consider Post Closing Time Commitments
Business owners often fail to consider that many M&A buyers, especially financial buyers, will require them to remain involved with the business in some capacity for a period of one to three years following the mergers & acquisitions transaction is completed. When coupled with an average time to sell a business of nine to twelve months unless it is a fire sale or if the owner is approached by an M&A buyer, a business owner desiring to be free and clear of any further responsibilities to the business in three years should begin the mergers & acquisitions sale process today.
Making Large Capital Expenditures
Large capital expenditures made a couple of years before the mergers & acquisitions transaction closing generally reduce the net value a business owner receives at closing. The reason is that M&A buyers will net the outstanding expenditure loan payments against the debt free value they calculate for the stock, or the owner will have to pay-off the loan in the case of an asset sale. Unless the expenditure results in a significant increase in earnings, it is best to forgo these expenditures and let the M&A buyer assume the obligation or sell the company prior to when they become a requirement.
Lack Of Defensible Financial Records
M&A buyers, and particularly their financial backers (investors, banks and mezzanine firms, etc.), often require reviewed or audited financial statements for at least two years from a respected CPA firm. Today, failure to have these statements will negatively impact, the selling price, cash received at closing, and the buyer’s ability to receive financing of a mergers & acquisition transaction.
There are more pitfalls that can negatively impact the net proceeds received from the sale of a business in an M&A transaction. Owners should protect their years of sacrifice and hard work initiating exit planning, and by assembling your financial advisory team, led by a merger & acquisition advisor, well in advance of your desired exit date.