The decision to sell your business can be quite emotional, “a crescendo moment,” says Domenic Rinaldi, president and managing partner at Sun Acquisitions.
While there’s nothing wrong with that on its face, it can often cause a seller to lose sight of the many steps that must be taken to negotiate a good deal and execute the sale.
“It can take a year or more to sell a business,” Rinaldi says. “When you take your eye off the ball, you lose focus on the business and then things start to suffer. You’re not as engaged as you were. You're not doing the same things you were doing before and all of a sudden, the business starts to decline. And once that happens, buyers get very nervous. Not only is there the risk of losing value, but there's the risk that the business doesn't get sold.”
Rinaldi has more than 30 years of experience counseling clients on M&A transactions.
Smart Business Dealmakers spoke with him about a situation in which a seller’s lack of focus killed a deal, tips on identifying the right buyer and the problem with selling to a competitor.
Keep your eye on the ball
I had a situation last year with an owner who had built a great business, but he was really tired and wanted to sell. We told him when he listed his business, ‘Listen, we know you're tired. But stay focused. Keep running the business.’ We have a checklist of things that we go through when people engage with us before we go to market. One of the items is to stay engaged in the business and run it better than ever. He didn't do that. He took a vacation. In fact, he took many vacations. Six months later, the business had declined so much that we actually had to take it off the market.
Another common mistake when you’re in the process of selling is to make investments or make changes that shouldn't be made in the middle of a sale. The seller will go buy a big piece of equipment that they're not going to get the return on investment for before the sale. If it's needed because something broke and you have to do that to keep the business running, that's one thing. But buying machinery just to buy it is a bad idea. Or you’ll see sellers make key changes with employees in the middle of a sale process. Again, if you have to do that, that’s one thing. I always tell people run the business as though it's not being sold. But making wholesale changes like that in the middle of the sale process can be very disruptive if you don't need to do it.
Focus on getting your house in order if you’re preparing to sell your business. Talk to someone with experience in M&A transactions about what documents you need to pull together, what you need to be prepared for when you get to the offer stage and don’t underestimate how intrusive diligence can be. Surround yourself with people who understand M&A transactions and can guide you through the process.
Identify the right buyer
It’s helpful to have an intermediary between you and a buyer, someone who can vet potential buyers very carefully on a couple of different levels. Have they done acquisitions before? Do they understand how to execute an acquisition? Do they have the capital available to make the acquisition? If it's a strategic acquirer, what are the strategic goals? What are they trying to do? This intermediary can vet buyers to make sure it's a really good fit before they disclose you as the seller. You don't want disclosure unless you're convinced it’s a good fit.
Build out a very detailed marketing plan down to the level of here are the people that we're going to pick up the phone and call proactively to see if they're interested in making an acquisition. That includes private equity groups, strategic and financial buyers. If you do your homework right upfront, I'm not saying that you're going to get those buyers interested just because you did the homework, but at least you know you're fishing in the pond that would make you the happiest. If they don't respond then, maybe there's just something wrong with the business that you need to determine. Maybe the price is not right. I wouldn't leave it to chance. Be strategic so you are bringing the right buyers in the door
I counsel sellers to start the sales process somewhere other than with a direct competitor, unless we really think that is the best option. You typically don't get the best price and terms from a competitor. In all my years of doing this, very rarely do we find that competitors will come in and offer a premium on price and terms. That's not an absolute. There might be a geographic expansion with a competitor and they want to get into a market and they'll pay a premium to get into that market. So it's not absolute. But often, especially on a local level, we just don't see where it makes sense. Why disclose that you’re for sale to your competitors if there's a high likelihood that they're not going to offer you a premium price and terms, especially when there's so many other buyers out in the marketplace?