Top 10 Most Important Things to Consider When Selling a Company
We are often asked, “What are the most important things I need to consider when selling my company to ensure I get the best outcome?” There are many things to consider, but we find there is a solid “Top 10” list that has the greatest impact on outcomes.
However, it’s probably best to start with defining the “best outcome.” Our clients consistently tell us that three primary items determine the optimal outcome for them; those items are:
That a transaction occurs,
It takes place at the highest valuation, and
The contract terms are the most favorable to them.
Our Top 10 list below is not in order of importance, but more in order of logical consideration.
1. Get Professional M&A Guidance
The buying and selling of companies is a mature industry that has a long track record of the best and worst practices leading to the best and worst outcomes. The single biggest mistake any business owner can make when selling his business is to do it himself. Selling a business without the assistance of an investment banker consistently leads to a higher probability of no sale occurring. Even if a business does sell without the assistance of an investment banker, the process will take far longer, the sale price will be much lower, and the seller will regret the contract terms after the sale closes. These circumstances invariably lead to the most expensive lesson a business owner ever learns. Ironically, the owner was thinking he was going to save money. M&A professionals add so much value to the sale process that they pay for themselves many times over.
The implications are far more profound than most owners realize, so it’s worthy of some explanation. Unless you negotiate M&A transactions often, you just don’t know what you don’t know. This is a classic knife-to-a-gunfight scenario. The other side of the table is much more experienced, and yet they will still have professional advisors behind them. Most often, we find that the more personable and disarming the buyer appears to be, the more dangerous he is. Buyers are much more sophisticated than do-it-yourself sellers in terms of deal structures, valuation, contract terms, and manipulating risk to the seller in many subtle ways. Keep in mind that purchase agreements are often 100 pages long, and every term is designed to transfer risk to your side of the table.
In addition to thinking do-it-yourself is a money saver, most owners feel they can sell themselves, their company, and the company’s offerings better than anyone else. And why wouldn’t they think that—they’ve been doing it for years. The problem is that a buyer is not buying either the owner of the company or the company’s offerings. The owner’s normal “sales pitch” actually works against him, but he doesn’t realize this or know why. The pitch needs to be completely changed, and often in counter-intuitive ways.
There are four additional unintended consequences of the DIY approach:
First, it sends the message to the buyer that the owner has poor judgment; the buyer will wonder where else the seller has used poor judgment in running the business. The buyer always assumes this adds risk, and he will find ways to make you pay for that additional hidden risk.
The seller always underestimates the level of distraction that he will suffer in the sale process. A sale forces the owner to take his eye off the ball in many ways, and this always affects the business’s performance. To achieve the best outcome, the sales process may take six months to a year, and the trajectory of the business during that time will have the greatest impact on its valuation. It’s very common to see the greatest loss in company valuation take place during that short time.
When the owner becomes distracted, the employees, customers, suppliers, and even competitors quickly figure it out and the rumors start to fly. Confidentiality is lost, and the market damage can be significant.
In most cases, the seller will be required to have some form of continuing relationship with the buyer, which can last from months to years. It’s important that you don’t damage this new relationship in negotiating the sale, so it’s equally important to use professionals to play hardball on your behalf when necessary during the negotiations. Use them to keep you from creating any bad blood that could impact your outcome in the long run.
In addition to licensed M&A advisors, there are three other professionals that are necessary to produce the best outcome. They will also pay for themselves many times over.
An absolute must-have is an M&A lawyer. The negotiations and contracts in the M&A world are so unique that a company’s corporate lawyer will do the owner a great disservice if that lawyer negotiates the sale, regardless of how good that lawyer is. In fact, it makes the process so much more painful for both sides that some buyers will refuse to continue the process unless you have an experienced M&A lawyer on your side.
Find a tax accountant who understands the tax implications of M&A transactions. The key consideration is not what the company sells for; it’s how much of the sale proceeds you get to keep in your checking account.
If you know selling is on the horizon, consider getting a company accountant that has already been through M&A diligence to prepare the company’s books and records for scrutiny by the seller’s professionals.