Don’t leave a bunch of money on the table…
When it comes to buying companies, no one knows the process better than our friends at KLH Capital. As a private equity firm they are in the business of buying companies every day, so we thought we’d ask them for some advice on exit planning and common mistakes made during the business sale.
Ron W. Moore III, an associate at KLH, has come up with the top business-selling mistakes that he sees from clients. He knows exactly what can kill a deal in an instant, so listen up:
1. Selling without representation
It is of course possible to successfully exit a company without this, but consider this: many buyers of businesses are in the business of doing just that: buying companies. Most sellers have not sold multiple times, so before you’ve even started, there is likely to be an advantage to the buyer, unless of course you enlist the help of a professional. Exit planning and selling your business is one heck of a game of chess, so it’s wise to utilize the help of people who play it for a living.
2. Selling to a single bidder
It seems very obvious to say that having more than one bidder on anything is going to drive the price up. We’ve all used Ebay, right? And yet so many businesses forget about this simple concept. The majority of businesses are sold as a result of an unexpected offer, and it is maybe the surprise element of this that seduces sellers into getting a deal done without really thinking it through. The site of the gold pot at the end of the rainbow can be enticing, however don’t forget that it could be much bigger if your exit planning was done correctly.
Would you only let one person bid on your house?
However good an offer may seem, it’s wise to see if there is anyone else in the marketplace who might be interested. A classic mistake clients make is to think they’re being dishonorable by putting their company out to the market after they’ve begun talks with a bidder. There is nearly always time to go through this process without it upsetting the original bidder. And being honest about it is perfectly fine as well – any serious buyer should understand if you tell them that you’re doing this.
3. Poorly constructed earn out
Selling a business is often about more complicated than getting one check right up front. I am not saying that doesn’t happen. Many deals incorporate an “earn out” for the seller, where for a set length of time after the deal they are paid out depending on the performance of the business. But how do you measure ‘performance’? There are many possible formulas and metrics, so it’s vital you pick the right ones. There is an element of crystal ball gazing here which means that judging the potential value of a future earn out can be highly complex, but it really is worth taking the time to get this right before a sale is agreed upon and the ink is dry. Afterwards is simply too late.
4. Disclosing insufficient information before the due diligence stage
If you’re going to take one soundbite away from this, it’s: “they’re going to find out eventually”. As tempting as it might be to paint an overly positive picture of your company during early negotiations, you might well ruin the deal further down the line. Problems are easier to work around when they are disclosed up front and the buyer feels they can trust the seller. There’s nothing like a nasty surprise to blow up a deal.
5. Letter of intent not thorough
This is about knowing what you want, when you want it and why you want it, and then putting it into legally binding words. This is your absolute statement – the best opportunity you have to get the maximum amount out of a deal. Forget something here and it’s a real struggle to work it into the deal later.
Good news: Ron and KLH have plenty more tips like this for you to read. Click below to view a special infographic that contains all 14 of their top seller mistakes in a short-and-sweet, bitesized format.