Thursday, March 29, 2018

Selling Your Business: Pitfalls and Tips

Investment Banking

For most business owners, selling their business is a once-in-a-lifetime event capping decades of tireless effort in building and sustaining an enterprise. The process for selling a business has become increasingly complex, and the universe of potential buyers keeps expanding. So understanding best practices and avoiding the common pitfalls of business transitions are essential to achieving an optimal transaction result.

Here are four common pitfalls and tips for avoiding them:

  • Inflated valuation expectations: Entering into a sale process without understanding market conditions, industry dynamics, and key value drivers of your business can thwart an otherwise attractive business transition. Business owners often come to us with high valuation expectations. Usually, those expectations are based on emotional or personal financial needs (how much is needed to fund retirement, buy a new beach house, sail the world, etc.) or on anecdotal data points rather than on prevailing market conditions, industry trends, and fundamental valuation concepts.
    • Tip: Engaging with a financial advisor or business valuation expert before exploring a sale can both educate you on the likely value of your business and avoid transaction failure due to insurmountable buyer vs. seller valuation differences.
  • Taking your eye off the ball: Distractions derail transactions. The sale process can become a black hole, devouring time and attention – and often the business owner is the only one who can answer certain questions or compile sensitive information.
    • Tip: Too frequently, we see business owners get preoccupied with the sale process, personally take on too many tasks, and lose focus on running the company. Then, when financial performance slips, prospective buyers will almost always demand a price break – or even walk away from the deal altogether.
      Considering that the average business sale requires six to nine months and involves significant time, effort, and resources throughout, an investment banker can shield the business owner from much of the time-consuming administrative details of executing a complex transaction and improve the odds of success.
      A recent study examining the value of an intermediary in a sale process found that “managing the M&A process and strategy” was the most valuable service provided by an investment banker to business owners who sold their companies successfully.
  • Not delegating: Business owners can be terrible at delegating authority. The combination of a protective concern for the business and a history of being “chief cook and bottle washer” makes it difficult to entrust higher-level duties to other managers. Though there is undoubtedly risk associated with assigning key roles to managers with less-aligned interests, the risk of a valuable enterprise relying too heavily on one individual is even greater. Companies with distributed authority and broad management expertise find it easier to complete a transaction than those with just one or two key managers.
    • Tip: To gain appreciation of a buyer’s perspective on management succession, business owners considering a sale should begin by asking themselves, “How well could my management team run the business in my absence?” If the answer is “not very well,” developing the next layer of management should become a high priority to improve the likelihood of success with your business sale.
  • Negotiating with only one party: As noted, the exit planning process is time-consuming and complex. Additionally, exit planning can be emotional and falsely viewed as planning for the end of the business. For these and other reasons, business owners may get immobilized by indecision, put off a sell-side process, and simply wait until a random interested party knocks on their door.
    • Tip: While this approach may seem more efficient and cheaper, the old adage of “one buyer is no buyer” often proves true. Engaging in a broad-based sale process that includes a roster of qualified potential buyers is critical to achieving the optimal outcome. An orchestrated M&A auction process maximizes value, helps ensure optimal terms, and extends the seller’s leverage by maintaining multiple competing bidders until a winning bid is accepted.

Hilliard Lyons Investment Banking discusses these issues with every client who believes that a third-party sale may be a desirable option, or who believes it is an important path to consider in his or her transition away from the business. A proactive approach to planning and executing a sale of your business is critical to achieve the best result. We would welcome the opportunity to talk with you in more detail about preparing an action plan to help you transition away from your company, whether your time horizon is near or far.

We believe that the information in this newsletter is reliable, but we do not guarantee its accuracy, and it may be condensed or incomplete. This newsletter is for information purposes only, and is not intended as financial, investment, legal, or consulting advice.