Smith Holland M&A Resources  

Common mistakes to avoid when selling your middle market company.

Entrepreneurs spend years building their company infrastructure, trademarks, products and equity. Eventually, this hard work will culminate into the decision to sell the business, hopefully for a nice profit! Unfortunately, navigating the confusing and complicated deal life cycle can be costly. These are the most common mistakes made by entrepreneurs during an exit strategy.

 

  • Not Hiring a Mergers and Acquisitions Advisor - Undeniably, the worst mistake an entrepreneur can make during an exit strategy is to not hire a mergers and acquisitions advisor to represent them. The key to getting multiple offers and the best valuation for a company is to hire an M&A advisor that exclusively represents sellers. Sellers can avoid expensive mistakes during an exit strategy by taking advice from a professional M&A advisor. If an entrepreneur follows this one simple rule, they can avoid all other common mistakes since an experienced M&A advisor has been through hundreds of transactions, understands the deal life cycle and what it takes to get to a successful close.

 

  • Unrealistic Valuations - A common mistake during an exit strategy for an entrepreneur is to overprice their company. While most business owners seem to think they can put an accurate value on their company, more often than not, these entrepreneurs are emotionally invested and have unrealistic valuation expectations. Qualified buyers have likely purchased companies before and won’t even take the time to examine overpriced or high multiple businesses for sale on the market. Buyers understand that dealing with an unrealistic seller is a waste of time and consequently, a high percentage of businesses that do not sell are because the seller is unwilling to negotiate fair market value for their company. The majority of traditional businesses for sale will not come close to a Facebook or Pinterest valuation and therefore, will not get a 100x EBITDA multiple. Having a knowledgeable sell-side M&A advisor can help entrepreneurs during their exit strategy which saves not only time and effort from the frustration of an unrealistic valuation but more importantly, money.

 

  • Not Recasting Financial Statements - Another mistake an entrepreneur makes when selling their company is not recasting financial statements. Most business owners reduce bottom-line income to minimize their tax liability, so it’s important to hire an expert M&A advisor that can recast financial statements to maximize the valuation for a company. Before going to market, adjusting the financials will give buyers a more accurate representation of how much EBITDA a company is truly capable of producing. Buyers will have an exhaustive due diligence period and sellers need to be prepared to clarify the addbacks. A qualified M&A advisor that exclusively represents sell-side M&A deals can explain to entrepreneurs which category adjustments and how much can legally be added back in order to make a company look the most attractive in the marketplace.

 

  • Trying to Sell Potential - Entrepreneurs value potential too much. Since buyers cannot argue the past performance of a company, valuations are based primarily on multiples of EBITDA. Growth opportunities and the future potential of a business help leverage competitive offers but unfortunately, entrepreneurs try to overvalue that company based on potential. It is vital for business owners to begin the foundation of those opportunities before selling, so they will have statistics and historical performance data to warrant a higher valuation. Growth opportunities can be lucrative for buyers in the future, but they are not going to base a multiple off income growth and achievements they create for themselves in the future. For this reason, an entrepreneur can mistakenly try to overvalue potential and it is important to have a sell-side M&A advisor to help clarify the best exit strategy for a company before going to market.

 

  • Not Understanding Important Legal Documents - Entrepreneurs need to understand that there are many important legal documents to be considered when selling a business. Listing agreements, non-disclosure agreements, letters of intent and purchase agreements are only a few of the documents a business owner will encounter throughout the deal life cycle. Every entrepreneur should be prepared and understand these documents before selling their business and having a trusted M&A advisor on your team can help explain these legal agreements.

 

  • Letters of Intent - Entrepreneurs need to know that M&A deals fall apart for a number of reasons but the most common involves a poorly written or structured LOI. Even though an LOI is non-binding, it is vital to make sure this document is not too vague and doesn’t leave room for interpretation in the buyers favor and sellers’ disadvantage. From the beginning, it is important to navigate through the LOI process correctly and having a sell-side M&A advisor who has been through hundreds of deals is the best way to ensure a successful transaction. Otherwise, an entrepreneur may think they have a favorable LOI until they realize it has cost them not only the initial buyer but also a reduced valuation when they have to go back onto the market when the deal falls apart.

 

  • Whether to Include Real Estate with Deal - Entrepreneurs make mistakes when decided whether to include real estate with the transaction. While each M&A deal is unique, there are obviously positives and negatives when deciding whether to including property with the sale of a business. Early discussions with a sell-side M&A advisor can determine which decision is best for each individual company. After real estate has been appraised, a dedicated M&A advisor can guide entrepreneurs through all options to decide the most beneficial way to present a company to the market for sale. It is important to discuss all real estate strategies with a professional since the structure of a business valuation can be the difference between a deal or no deal.

 

  • Not Considering an Earnout - M&A transactions can be complicated and potentially expensive, which is why most entrepreneurs make the mistake of not considering an earnout. It’s important to have a skilled M&A advisor who can explain and point entrepreneurs in the right direction when considering an earnout structured purchase agreement. An exclusive sell-side M&A advisor understands that an earnout can be very profitable and provide maximum value for a seller but only if structured correctly. Almost as important, the refusal or eagerness to engage in discussions regarding an earnout demonstrates to potential buyers whether or not the seller believes in the future of their company. It is vital to have an M&A advisor on your team to help navigate the best options, since the difference can be a gratifying experience or depressing few years after you sell your business.

 

  • Not Accepting a Good Offer - While the first offer a seller receives may not be the best, some entrepreneurs mistakenly hold off with hope of a better offer in the future. This delay could be costly as losing a potential buyer cause a seller was indecisive and waited too long to accept an offer, could mean that seller might have to settle for a worse offer down the road. It is not always wise to say yes to the first offer, but not always right to say no.

 

Conclusion

Every entrepreneur makes mistakes. Fortunately, some of the most common mistakes made by entrepreneurs during an exit strategy can be avoided by simply hiring an exclusive sell-side M&A firm. Of course, entrepreneurs can try and sell a company on their own, but generally it is much cheaper to hire an M&A firm in the long run.

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