Going through the M&A process can prove time-consuming and difficult. Achieving success requires a timeline and strategic planning while making sure that key advisers are part of the process. Unfortunately, many businesses that go up for sale never complete the transaction — 83 percent fail due to a lack of proper planning.
External factors — such as the state of the economy and current business results — can affect whether a deal gets done. But the most vital factors impacting the outcome of an M&A transaction are typically internal.
Here are five mistakes businesses often making when preparing to sell.
1. Disregarding the value of their business
Owners choose a target number to net from a transaction, but this number may not be based on sound valuation metrics. Even in business, value lies in the eye of the beholder. There’s always a range that will apply, regardless of the type of buyer.
Before focusing on selling, work with an M&A adviser to determine the value range of your business and the buyers to target to yield the highest return. You can better negotiate for your needs by recognizing and asserting the value of your business and matching that to the buyer’s needs and goals.
2. Not understanding buyer perspective
Every buyer walks into a meeting with a different perspective about the value of the business and what they’re looking for. Investors search for a business with a good return on investment while synergistic buyers may focus on increasing the profit margin by removing the middleman or extraneous facilities.
Don’t sell to the wrong buyer. The ideal buyer is most likely not a friend, a supplier or a competitor. Consider how the deal would add to the buyer’s range of assets. Understand your buyer’s criteria and use that knowledge to market toward their interests effectively. Follow these steps and you’ll negotiate better terms for all involved.
3. Failing to position the business for sale
Have you properly positioned the business for sale? Showcase the business in the best light for the buyer based on their interests. Consider factors such as growth opportunities, industry leadership, reputation, a diversified customer base and a lack of dependence on owners. Elevate the perceived value by documenting improvements that the new owner can make with new capital.
4. Failing to prepare for due diligence
Buyers will look at the history of the company, but they’re interested in the statistics about the risks involved, growth potential and return on investment. Take time to analyze the growth potential of your business and advocate for that during the negotiation process. Take time to do your due diligence in projections and intensive analysis to better position your business.
An experienced M&A adviser should prepare a complete data room with the documents and essential information that the buyer wants to review. Include patents, contracts, employee information, financial statements and projections. While time-consuming to create and organize, a data room could make or break an M&A transaction.
5. Not hiring an experienced M&A adviser
An experienced M&A adviser already has relationships with potential buyers in place that can be leveraged for your benefit. Your adviser assists you and your legal team with optimizing the sale process for a successful deal by:
- Preparing an executive summary and information memorandum for buyers
- Prospecting for buyers and coordinating meetings
- Coordinating NDA signings
- Setting up a complete data room
- Fielding responses to due diligence requests
- Prepping management for presentations to buyers
- Advising and leading during negotiations on price and deal terms
Owners looking to sell also often fail to think of their future and their needs in retirement. They continue to make concessions to the buyer, hoping to seal the deal. This can easily leave the buyer with the impression that the seller is desperate, causing the buyer to back out. That’s a big reason why a large percentage of mergers fail.
Do you understand your buyer’s perspective? Have you properly positioned your business? Educate yourself and prepare for the transaction to avoid making these five mistakes from the outset.
Domenic Rinaldi is president and managing partner at Sun Acquisitions. He has more than 30 years of experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena. His articles have appeared in numerous publications, Including Entrepreneur, Smart Business, Lawn & Landscape and HVACR Business.