There are numerous mistakes that many business owners make when selling their private company, as well as lost opportunities for maximizing shareholder value. These mistakes and lost opportunities occur at both the pre-sale planning stage and during the sale process itself.
Pre-Sale Planning and Preparation
The most common error that business owners make in pre-sale planning and preparation is failing to do so adequately. Many business owners do not contemplate that a sale or transition of their business is, at some point, inevitable. While such an occurrence may not be contemplated in the near term, business owners should recognize that circumstances often change (e.g. health issues) or unexpected opportunities may arise (e.g. an unsolicited offer) that are the catalyst for a transaction. Inadequate presale planning and preparation often means missed opportunity in terms of deal structuring flexibility and income tax savings for the business owner.
Another common error in planning for the sale relates to timing. Some business owners wait until retirement before planning their exit. However, most buyers of privately held companies want the former business owner to remain for some period of time following the sale to ensure a smooth transition (often 1 to 3 years). This can disrupt the owner’s retirement goals or, for those not willing to remain post-sale, result in a significant price reduction.
A related timing mistake is sometimes referred to as the “grow it one more year” fallacy. That is, business owners that have experienced a few years of good growth sometimes believe that their business will be worth much more given another growth year. This may not be the case where a buyer believes that subsequent growth potential has been eroded or, worse, changing economic or industry conditions result in flat or declining revenues and profitability.
The Sale Process
One of the opportunities that business owners miss when selling their company is not considering strategic buyers in other industry verticals that might view their company as a platform for future expansion or other strategic fit. In addition, financial buyers often are overlooked, which buyers are becoming an increasingly prominent force in corporate acquisitions.
With respect to preliminary due diligence, a common mistake is where the business owner and their advisors fail to control the dissemination of confidential company information. This is important to avoid premature disclosure of highly sensitive facts and in order to escalate the auction process to generate maximum value.
Business owners sometimes place too much emphasis on the stated purchase price and do not adequately consider the terms of the deal. As a result, they may enter into an arrangement that contains a high level of collection risk or one that is not structured in a tax-efficient manner.
It also is common for business owners to underestimate the importance of the letter of intent. While not a legally binding document, the letter of intent sets the parameters for subsequent price and deal negotiations. Where the letter of intent is too generic or ambiguous, the business owner bears greater negotiating risk.
Finally, business owners sometimes fall into the trap of not actively managing their company during the closing period. Where the company’s financial or operational results are allowed to slip prior to closing, the buyer will sometimes seek to renegotiate certain parts of the deal, to the detriment of the business owner.