Selling a business takes a lot of preparation and successful transactions often require years of planning and careful consideration. There are several mistakes that business owners should be aware of when considering selling their business, to increase their chances of a successful transaction.
Who’s in charge now
Some of the first questions buyers ask is: why are the owners selling their business? Who is going to run the business after the owners exit? Who are the key management personnel? This is especially important if owners are considering selling to financial players, who typically rely on someone else to run the day-to-day operations of the business for them. It is important to consider who is going to hold the key customer relationships, ingrained understanding of systems and processes, and uphold the values of the business. Having a second in charge or a CEO employed makes the business more attractive to buyers as it removes dependency on the owner. Ultimately, owners should be able to clearly articulate how the business will not only survive but grow without them, and that existing people and processes are readied for the sale.
Getting the books ready
A business is judged on the financial records it keeps. Incomplete or inaccurate records chip away at a buyer’s confidence and, in turn, the business’ value. As a basic rule, you should be able to provide monthly profit and loss statements, balance sheets, cash flow statements and annual tax returns. Owners need to begin thinking well in advance of any sale about whether their financial information is in order. Company records must be organised to clearly show the business’ current state to buyers in a true and accurate way.
In the middle market, customer relationships are important so buyers often request sales by customer as a way to test a business’ customer diversification. If owners can present strong customer relationships (supported in number of years), buyers will be given confidence. Different businesses will have to provide different information, manufacturers will have to provide details of inventory by Stock Keeping Units (SKU) while service-based businesses may be required to provide information on employee utilisation.
Owners often underestimate how much time it takes to prepare Virtual Data Rooms (VDRs) which house documents during a due diligence process. VDRs can take anywhere from weeks to months to prepare and almost always result in complex issues arising, like incomplete reports, unreconciled reports to financial statements or gaps in processes, which owners had not previously considered from a transactional perspective. While no business is perfect, it’s important information deficiencies don’t lead to value erosion.
Timing is everything
Owners must consider timing when selling their business. Both internal and external factors need to be taken into account. Internally, the business needs to be in a position to sell. Are there any open vacancies for key employees or has there been a recent loss of a significant customer? Externally, are there any recent government reforms or regulation changes occurring in the industry? How will the general economy play a part in buyers’ minds?
For example, in the latest Pitcher Partners Dealmakers report, high interest rates and steady inflation are identified as key impacting factors that may stand in the way of a successful deal. And wariness remains over deal assessments and investigations. Some 43% of respondents are finding due diligence in the current environment harder compared to 12 months ago. The challenge is finding evidence of how resilient certain businesses are amid inflationary pressures and various post-pandemic macroeconomic uncertainties.
Selling when revenue is declining is a big red flag for buyers. Businesses that present growing revenue and earnings, at least in the last 12 months, are much more attractive, but even better would be growth over the last three years. Finally, are buyers currently active and open to further acquisitions?
Know your value
Attempting to price a business too high can drive away buyers. But pricing a business too low will mean sellers unknowingly leave money on the table that buyers may have been willing to pay for. Many owners can overvalue their business due to the emotional attachment they hold with it. Business owners can determine a sense of their business’ value by completing research into mergers and acquisition (M&A) activities within their industry. However, they must be aware of nuances that can influence the purchase price a seller would consider. Knowing a business’ value will provide owners with the best means to negotiate on price, as they know where the true value lies, without the guesswork.
Bring in the experts
A common pitfall is that the owner does not have a financial advisor engaged early in the process. Selling a business is a full-time job. Many owners need to focus on running their business and do not have the time commitment available to sell their business on their own nor do they have the detailed knowledge to handle some of the transaction specific intricacies. Having a financial advisor versed in M&A should pay for itself many times over.
About the contributor
Michael Cullinan is a Manager in the Corporate Finance Team at Pitcher Partners Melbourne. Michael specialises in advising clients on the sale of their business or their strategic acquisitions.
