- Posted by Clear Rock
- 0 Comments
Deal Killers: 5 “Do Not’s” for Selling a Company (Part 1)
We spend a lot of time talk about what TO do when you are considering the sale of a company. In this article we focus on the opposite: deal killers. We discuss some of the most frequent “deal killers” we see in working with transitioning business owners.
RELIANCE ON RULES OF THUMB
“I know how much my business is worth. All X companies sell for ____(insert rule of thumb)___.”
rotNo, they don’t. Some may, some may not. Rules of thumb are great for back of the napkin discussions, but they are distinctly NOT great when you want someone to write a check for what is likely your largest asset. Corporate Buyers don’t rely on rules of thumb. Private Equity groups do not rely on rules of thumb. Lenders certainly do not rely on rules of thumb. So if the three groups most likely to influence the amount of the actual check written, why would you?
Tip: Become familiar with the actual factors that DRIVE value, and consider hiring a valuation expert early in the process.
Become familiar with accepted valuation techniques. Most industries seem to have perceived techniques for valuing businesses. Many of these rules of thumb, however, are not accepted by the valuation / lending industry. Owners should avoid listening to uninformed sources for determining value, just because those sources are in the seller’s industry. Owners that have sold a similar business will not be informed sources, in that they tend to not understand all of the intakes that went into making their own sale.
LISTENING TO PRICES FROM OTHER SELLERS
First, comps are often not easy to find for private transactions. Beyond that, cocktail hour talk from peers that have sold oftentimes exclude very pertinent deal attributes: what was included in their sale? Full balance sheet or carve outs? Seller financing? Earn out? How difficult are the hurdle rates? How was debt handled? What about indemnities? Reps and Warranties?
Without getting a grip on the above, it’s really hard to get a true picture of the value conveyed.
OVERPRICING (OR OVER “VALUING”)
You’ve heard it time again: your company is worth what someone is willing to pay for it. And someone will be willing to pay market for what the business is doing today- and likely to do- based on it’s current performance. Many sellers think that a long history, a well known name, and their “blood, sweat, and tears” should be factored into value. And they will be – all based on how the business performs, but not by adding “extra” value for them.
POOR RECORD KEEPING / FINANCIALS
We all know that business owners try to “tax manage” their financial statements. Some do this by timing AR/AP or inventory. Others take this to the extreme and use the business as their piggy bank. While we can work with these items to some extent, the more “adjustments” you have in the pro forma statement presented to buyers, the more risk they perceive. (And you can bet that EVERY adjustment will be checked to the last penny during diligence).
Beyond the issue of adjustments, having clean and orderly records gives a buyer a sense that the business is solid, the owner has a firm understanding of performance, and that they are more likely to get the asset that they THINK they are buying. All these points tend to increase “sale-ability”.
Tip: Consider a “pre-diligence” exam of your books and records BEFORE you actually start marketing the business.
attitudeThe sale of a company is a massive undertaking. It is likely going to take the better part of a year to complete, and is bound to involve a good amount of stress. Business owners that have not fully bought into the process, or worse are just “kicking tires,” face an exceptionally high likelihood of failure.
It’s important to remember the principal of substitution: the buyer does not have to buy YOUR business. In nearly every case they can simply go find a similar business and still accomplish their goals.
Having a positive attitude, fully committing to running a sale process, and negotiating in “good faith” are all elements likely to increase your potential for sale.
We’ll continue on with some of these points in the second part of this series. In the meantime, if you have one to add drop it in the comments and we’ll take it up in the next part of the series.