As a business owner and potential seller of a large growing company, you may have interested buyers come knocking unsolicited. Many entrepreneurs receive these inquires unprepared and leave themselves open for many common mistakes that may have great consequences. The following article outlines some of the common mistakes made by business owners and what NOT to do if found in similar circumstances.
Don’t Go to Market? Intermediaries feel that it is in your best interest not to limit the field to one potential buyer or investor, but to have them help you package the company in the best light possible, and shop it to both synergistic and financial buyers. A synergistic buyer will usually result in the highest price and value to you as the seller because he can usually justify a higher price through economies and scale and additional opportunities that the acquisition will open up to them. By involving more than one investor or buyer in the opportunity, you will be helping to assure that you get a better price and terms than if you keep the potential buyer pool limited to just one.
Give Them Raw Data? Many business owners just give buyers the raw financial and other business documentation when requested. Your business will show best when it is properly packaged, conveying what your business is all about to potential buyers through a written document that we call a Confidential Business Review (CBR). It is the intent of the CBR to familiarize buyers with your business after they have expressed sincere interest and signed confidentiality agreements. The CBR will assist them in making informed decisions as to whether they want to further pursue the opportunity. The CBR typically takes 200 to 400 hours of time to put together. This is a substantial investment, both in actual hours and lost opportunity cost if a transaction is not completed. Intermediaries will be spending significant time both during and after compilation of the CBR on other facets of the overall process of bringing your business to market. When engaged, they’ll be working on the CBR from day one and the buyer will know that you are serious about getting an optimum price for your business.
Don’t Hire an Intermediary? Why should you pay an intermediary anything? What value does he add in this situation? Well, if we limit the discussion just to the buyer on the hook for the moment, an intermediary will act as the go-between to negotiate the best deal on your behalf. If a buyer believes he is the only player in the field, you are in a position of weakness and are unlikely to get his "best offer." There is no competition that may "outbid" him through the process. Also, if you are negotiating this yourself, it is unlikely you can put yourself in his shoes and look at the opportunity from his perspective. Intermediaries can talk buyer lingo, run models of valuation and internal rates of return at various price points and deal structures to assist you in getting the best price possible. In addition to negotiation, even after you have reached agreement on price and terms, there is a long road to travel with possible pitfalls before finalizing the deal. Intermediaries are there to assist you and help assure that the pitfalls don't become obstacles that keep the deal from being completed. So, to put it simply, they offer a "value-added" service even when the buyer has already contacted you. The fees paid become insurance guiding you through one of the largest financial and possibly most important transactions of your life.
Because intermediaries do not make a practice of recouping hour for hour what they spend on a project, they sometimes explore opportunities that the client normally would not explore on their own, incurring the majority of the expense out of their own pockets (at their own calculated financial risk). If you run through this process with more than one buyer, which is usually the case, the cost becomes increasingly burdensome.
Being prepared ahead of time always results in the best outcome. However, sometimes opportunities present themselves with little time for preplanning. In those cases it is best to surround yourself with something equally important - experience.
Mark Gould is a VERCOR partner and co-founder, Certified Business Intermediary (CBI), Mergers & Acquisitions Master Intermediary (M&AMI), and Certified Business Opportunity Appraiser (CBOA). Mark is also a co-author of “The Business Sale … An Owner's Most Perilous Expedition.” Mark has owned 10 businesses and has provided valuation, merger and acquisition services to over 500 companies in a wide range of industries. Mark works out of VERCOR’S West Coast office.
