In his recently published book, Perfect your Exit Strategy: Seven Steps to Maximum Value, Seattle investment banker Thomas Metz highlights what he sees as the top ten mistakes made by sellers of businesses. Family-owned businesses are not immune from these mistakes. We present a brief summary of the list with Mr. Metz’s permission:
- Confusing Price with Value.
The buyer and seller need to agree on price, not value. The price can be determined any number of ways. “Value is in the eye of the beholder.” Don’t get locked into valuation formulas or multiples in determining price when determining strategic value, as, for example, in technology companies.
- Unrealistic Price Expectations.
Unrealistic expectations can derail a good transaction, and drive away an otherwise interested buyer. If you are looking to maximize price, get as many offers as you can and then take the highest one.
- Trying to Sell at the Top.
Don’t try to sell at the top of the market, because you will never know where the top is. The ideal time to sell is when larger companies have the greatest need to acquire your company; when they want your business, assets or technology.
- Waiting Too Long to Sell.
Metz believes that most companies wait too long to sell, perhaps because the business owners are optimists and always want to increase financial performance to the next level before selling. Strategic buyers want technology and capabilities, not revenue or cash flow. Although better financial performance helps, the transaction may not hinge on financial results.
- No Real Exit Strategy.
An effective exit strategy increases the probability of a successful exit. It means that the company is operating smoothly and has few areas of weakness. For a prepared company, the sale process will be less stressful and less disruptive.
- Not Engaging a Professional.
A CEO who tries to sell his or her own company is at a disadvantage. There is no way that a CEO can run the company and competently manage the sale process at the same time. An objective third party can help defuse unreasonable claims, establish a constructive atmosphere and minimize extreme posturing. If friction develops, the intermediary can be the “bad actor.”
- No Competitive Bids.
Talking with only one or a few buyers is a mistake that many sellers make. The highest price is achieved when there are multiple buyers and competitive bids.
- Poor Negotiation Problem Solving.
Overcoming problems in the negotiation process is an important skill. About 40% of transactions fall apart at least once. It is important to understand how the other party views the problem, look for multiple solutions, and not be too linear.
- Not Prepared for Unsolicited Offers.
More and more companies are being acquired early in their life cycles. Receiving an unsolicited offer is a common occurrence for technology companies. If an offer comes out of the blue, the company should review its strategic plan, examine the market and assess the buyer—and then, if a sale is an attractive option, decide whether to contact other potential buyers or numerous buyers.
- Neglecting Day-to-Day Operations.
Management must remain focused and continue to run the business to the best of their ability. Missing the numbers or losing a big customer can cause big problems when trying to close a transaction. Expect the time period for selling to take 6 to 12 months, and make sure revenues and business relationships remain healthy.
Thomas Metz is president of T.V. Metz & Co., LLC. He has been a boutique investment banker for 30 years, specializing in selling companies with strategic value.
Keith Baldwin is a business transactions and securities lawyer with a forty year history of serving clients’ legal needs. Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at firstname.lastname@example.org or directly at 425.646.6133.