Want to sell your company to the best buyer? Based on decades of our M&A experience, this article will reveal to you the most common ways that sellers kill deals. Despite the crucial importance of this topic to any owner looking to exit, we were amazed to discover that no other post addresses it. So to increase the chances that you won’t repeat the mistakes of sellers who cratered their own sale, read on.
(Make no mistake, buyers go wrong too. In fact, they seem to do so more than sellers. See our sister article HOW BUYERS KILL M&A DEALS. (Buyers also have the unique opportunity to go wrong again after the deal closes. We’ll talk about that in a later article but meanwhile see what Dealroom and Investopedia have to say.)
Selling is Serious Business
For both buyer and seller, the months-long M&A process demands consistent commitment. And during that time most of the burden is on the seller. They’re expected to run their business as before (or even run it better) while at the same time respond to buyer due diligence demands and manage high-stakes negotiations. For many entrepreneurs, selling their company can be the most demanding task of their careers.
Given all that, if you can’t jump into the process with both feet, maybe you should wait. See our article WHEN IS THE RIGHT TIME TO SELL YOUR BUSINESS? for guidance on that timing.
Buyers will abandon ship if they suspect you’re not placing the highest priority on dancing the M&A minuet. Examples of failing to do so are responding lethargically to requests, being disorganized, or worse, appearing evasive. In the business of M&A, time and ambiguity kill deals.
Fortunately, experienced M&A advisors can lighten much of the seller’s load and keep things on track. For instance, before an LOI is signed, yours should already have conducted “internal due diligence” on your company to assure that potential buyers can quickly verify claims about its performance. We say more about the duties of a qualified M&A advisor at the end of this article.
Let’s Be Reasonable
Of course your company is special. And it’s got lots of promise even if that’s not obvious from past performance. Be that as it may, at the end of the day the company’s value boils down to a number that the highest bidder will pay. And it’s the very rare buyer who has to pay anything at all.
So it’s on you to show concrete evidence that supports what you want. If you can’t, you may either have to lower your number or grow the business.
Figuring What’s Fair
How do you figure out what price for your business is “fair,” a value that you can defend with facts more than that’s what I want? Competent M&A advisors come at this question two ways: 1) What does the company’s future cash flow look like? And 2) What did other companies like yours sell for?
Ideally the two approaches converge within a rather tight range. You’ll want this valuation data to back up your asking price.
There’s one exception — one way to escape the prison of valuation based only on cash flow and comparable transactions. That’s when a “strategic” company believes that your business happens to fit its needs. Strategics are operating companies that compete in your industry or neighboring ones.
They have fixed infrastructure (SG&A) and competitive concerns that “financial” buyers like PE firms don’t.
Strategics can therefore make or save money by folding your business into their already existing systems of control, product/service delivery, and marketing/sales. They can even benefit by shutting down a business they buy to eliminate competition.
For these reasons, strategics can sometimes pay more for a target that its stand-alone cash flow justifies or that other buyers paid for targets similar to your business. Finding one willing to do this is another reason to retain an M&A advisor.
The Value of People
A last point on valuation: know that it’s almost always related to you and your management’s team’s willingness to stick around after close. If key people want out fast — say in less than six months — your sale price will likely suffer. Or you’ll see more contingencies placed on what and when you get paid.
We Can Relate to That
Because of the importance of confirming that a potential seller has reasonable expectations, among the first things we do is estimate the company’s value. We want our clients to get comfortable with that number range before we spend months preparing the company for sale only to find that they want a price nobody will pay.
We’ve published two articles on things you can do to enhance your company’s value before you market it for sale. One list is of projects you can usually complete in less than six months: HOW TO INCREASE YOUR COMPANY’S VALUE: A CURB APPEAL CHECKLIST. The second list is of projects that take longer but deliver more: HOW TO INCREASE YOUR COMPANY’S VALUE: A RENOVATION CHECKLIST.
Among other things, these two lists can direct your attention to seemingly innocuous but potentially deadly things, like a long-slumbering lawsuit threat. Landmines like these can dispatch your deal to an early grave. The concern in this case is that under the ownership of a bigger, richer buyer, a dormant lawsuit suddenly revives.
Who’s on First?
There’s a place for trusted employees and board members, but it’s not in the room with prospective buyers. You need a single point of contact with them for several reasons:
- Allowing multiple seller parties to interact with a buyer invites dissension within your ranks.
- It gives the buyer an opening to divide and conquer. It’s the “camel’s nose under the tent.”
- It raises questions about who’s in charge.
Another reason is that whoever your point person is, it should be the same person who manages the entire M&A process. Usually that’s an M&A advisor. Assigning an advisor to this central role isn’t because they’re control freaks. It’s because they need to herd multiple buyers forward like cats to create a competitive bidding environment for your company (or at least to create the perception of a competitive environment).
They can’t do that without knowing everything about each buyer’s purchasing rationale and degree of interest. Otherwise, they (or somebody else on the seller’s side) might give away something to a prospective buyer for nothing. That is, make unnecessary concessions. Or they could divulge confidential details about the seller or deal process. These and other untoward things can happen when discussions between buyer and seller occur on multiple, separate fronts.
We once had a sellside client who secretly met with a buyer for dinner despite agreeing by contract to not do so. Whatever was said that evening apparently didn’t go down well. The following day the buyer (the only candidate at the time) called to say he was out. Multiple points of contact between buyer and sell is among the most common ways how sellers kill M&A deals.
Rumors about a prospective transaction ding morale. Most of them are wild and wrong. But killing them demands time you don’t have and maybe force you into compromising denials.
Best thing is to stop them before they start by going deep undercover till the time the deal is done.
Of course, if a dialog with a suitor shows promise, you can’t handle the ensuring details all alone. You’ve got to allocate tasks in order to respond to all the different questions that arise when planning for a transaction.
So you carefully enlarge the circle of your mates on a need-to-know basis. You’ve already got their non-disclosure agreements. And you’ve figured out ways to reward them for helping out. We’ll talk in more detail about how to build your M&A team in the next section.
In a word, you’re not skulking around to machinate against your employees. You’re controlling information because you don’t yet know the final outcome.
Later, after you’ve signed the buyer’s purchase agreement (congratulations!), you gather all employees together to break the news. Among other things, you’ll say that the buyer is bringing new and bigger resources to the table that will benefit those who continue with the company. Examples are more career paths and responsibility.
You’ve already had separate discussions with employees who are critical to the company’s value and the new owner has compensation plans designed to encourage them to stick around.
Build an Able, Responsive M&A Team
As you begin to attract attention from prospective buyers, it’s time to assemble a team specifically designed to manage the M&A process. Its chief duties are to anticipate and produce due diligence responses, choose which buyers show the most promise, and negotiate terms. The team includes insiders and outsiders: insiders are you as CEO and/or owner or your designate and your CFO. Outsiders are a transaction attorney, M&A advisor who acts as team leader and if needed, CPA.
The CFO/CPA must know how to slice and dice both financial and operating data every which way (e.g., sorting customers by revenue, year, location, industry, margin, etc.) and do so quickly. You also need somebody to understand how the potential deal might affect the owner’s tax liabilities. Legal help becomes relevant just before the drafting of, or at least during, the term of an LOI.
The Importance of Being Counsel
It’s critical that your attorney be experienced in closing M&A transactions. Transaction counsel is very different from lawyers who deal in day-to-day corporate affairs or the owner’s personal business.
We’ve seen well-meaning but newbie M&A counsel fail to understand how deal negotiations are a game of give-and-take. The goal is to trade something of lesser value for something of greater value. Newbies may insist on small unilateral gains that kill deals. As the cliche goes, the operation was a success but the patient died.
Local, mid-sized law firms are often the best source of capable M&A attorneys for several reasons:
- They’re not as pricey as their larger brethren;
- They’re less likely to be distracted by larger, more lucrative clients;
- Other members of the same firm can quickly and relatively inexpensively address specialty issues as they crop up. Examples of such issues are employment contracts and complex tax questions.
Do You Need an M&A Advisor?
Professional M&A advisors on average increase the sales price of their clients’ companies by nearly 25%. Here’s some of the ways they do that:
- Since experienced advisors have seen how certain buyers value targets, they can suggest ways by which you could optimally position your company in their eyes.
- On your own you can’t test buyer interest without divulging to the market that you’re thinking of exiting. Your advisor can present the virtues of your unnamed company and test responses until the time comes to reveal its identity to the most promising few buyer candidates.
- You can of course entertain on your own a single buyer who might have initiated contact, or spend time entertaining a series of them over an extended period. But that means you wouldn’t have created a competitive bidding environment for your company. You also wouldn’t quite know if somebody else out there could have made a better offer. To find out, conduct a discrete auction.
- Your time is most productively spent running your business while your advisor takes buyers’ calls and blocks them from wheedling special favors from you. Remember that continued company performance is crucial while you’re seeking to sell.
- You don’t want to be seen grubbing around for concessions from buyers, or worse, issuing deal-breaker demands. You’re the good cop and your advisor can be the bad cop. He or she can be tough without future repercussions. You, on the other hand, will almost always have to live with the buyer for some time after close.
- You need somebody who knows the position of each interested party and how it changes over time so they can “work the room” for best offers.
- Other reasons you might retain an advisor:
- To clear the market. Most sellside campaigns require contact with hundreds of prospective buyers, both strategic and financial.
- To bring the same level of experience and sophistication to the deal as the buyer.
- To alert you to deviations from standard operating procedure during M&A discussions.
- To help you prioritize your objectives and understand what trade-offs may be necessary for you to achieve them.
- To advise you on how to rank buyer offers based on your multiple criteria.
- Last, a surprise to some, experienced buyers nearly always welcome competent sellside advisors for their ability to move deals along in a transparent, business-like manner.
- For more detail on what competent sellside IBs do, see our post WHAT DO INVESTMENT BANKERS DO TO SELL A COMPANY?
- And to learn what the differences are between IBs and brokers, see WHICH TO USE — INVESTMENT BANKER OR BUSINESS BROKER?
- Last note: If you uses an advisor, you better like him or her since you’ll be working side-by-side for the duration of your sellside campaign. That is, during one of the most important moments in most entrepreneurs’ lives.