In last month’s article, we looked at the first three of the “10 Biggest Mistakes Business Sellers Make” when selling their business. This month, I present you with mistakes #4 to #6 in the second installment of this three part series.
Mistake #4: Selling the Wrong Thing (or not knowing what you’re really selling)
Most business owners do not clearly understand why acquirers may be interested in their businesses. Or, more often, sellers think they know why buyers are interested but are mistaken in their thought process.
Recently, we were engaged by a selling client to sell their technology business. Our client was certain buyers would be interested in acquiring the company because of its outstanding technology and intellectual property. Our client insisted on emphasizing these attributes in our marketing materials and discussions. End of the day, the acquirer who bought the business did so not for the technology nor IP but, rather, for our client’s customer base and sales/marketing team. Had our client allowed us to emphasize all of the attributes of the company, we may have been able to garner a better deal for them.
While we generally have a good idea of why buyers might be interested, our clients are often very surprised at the factors motivating a buyer to acquire their businesses. For this reason alone, we like our clients to emphasize all positive…and negative… aspects of their business when speaking to potential acquirers.
Mistake #5: Not Knowing the Right Type of Buyer for Your Business
I live and work in Omaha, home of the Oracle, Warren Buffett. I firmly believe it is the new American Dream for business owners to sell their businesses to Buffett and Berkshire Hathaway. When I got into the M&A business 25 years ago, the “dream” then was to sell to a foreign buyer who would seemingly overpay for just about any type of company. Sadly, rarely is Buffett or a foreign buyer the right one for your business.
We spend a great deal of time with our clients helping them understand who will be the right type of buyer for their company. We don’t emphasize specific buyers, but types of buyers.
For example, we were working with the owner of a multi-location equipment dealership which spanned several states. The owner, who had built the business up over 35 years, wanted to sell the company to an individual since, as he always reminded me, “My predecessor who sold me the business gave me a chance, I want to do the same thing for my successor.” The problem was the business was of such a size that unless he wanted to sell it piecemeal, it was too large for any individual owner/operator to acquire. Ultimately, we sold the business to a strategic acquirer.
It seems as though every business owner has met someone at a tradeshow who says, “When you get ready to retire, call us, we’d like to buy your company.” The number of times this supposed interested party is willing to make a fair offer, let alone an offer at all, is very rare indeed.
Sellers of businesses must keep their radar sharp as to all the potential types of acquirers for their businesses. Many owners think they want to sell to a private equity group, but as we discussed in a previous article, not all businesses are good fits for PE buyers.
End of the day, if you as a business owner do not have a clear picture of your own exit strategy and goals, you are more likely to make a mistake in choosing the right type of buyer for your business.
Mistake #6: No Clear Vision for Growth
One of the most confounding questions for our clients is: what do you think will happen in your business over the next two to three years? The typical response is either, “I don’t have a crystal ball, how should I know,” or, even more often, “Our customers don’t tell us what they’re doing so how should I know.”
Unfortunately, neither of these responses is helpful for owners trying to sell a business. The fundamental mistake business owners make is:
Business owners sell the past and explain the future.
Business buyers need the past explained and must be sold on the future.
If you cannot sell a buyer on the future of your business, you will either fail in the sale or leave money on the table.
However, selling a buyer on the future is more than just saying, “If we had more money to run the business, we could grow faster.” The business owner who can articulate a definitive plan for the growth and development of his/her business will always be in high demand for any buyer.
Recently, we represented a company for sale who is a distributor of imaging supplies. Our client had grown the business to the point where they decided they wanted to sell to a private equity group in order to continue the company’s rapid growth and development. Working together, we were able to put forth a growth plan which outlined the company’s two main growth strategies, as well as several ancillary ideas which could be implemented depending upon the buyer’s own preferences. We had market research and data to back up the growth plans.
While we presented buyers with a broad outline of how big the company could grow, we did not include detailed pro-forma financial statements since we believed this could only get our client and us into trouble if specific plans were not met. We did, however, work with the buyer to help them finalize the pro-forma statement they needed to prepare for their lender.
End of the day, we received five offers from highly motivated buyers and ended up with a deal which was above our initial valuation expectations with a buyer who has been a perfect partner for our client. All of the buyers said the same thing: they were essentially investing in our client’s growth plan, a plan which they said was well conceived, clear, concise, and backed by facts and data.
If you are able to explain to a buyer how you got to where you are today (explain the past) and show the buyer how the company can continue to grow and develop (sell the future), you will be rewarded handsomely for your efforts.
Those are mistakes 4 to 6 of our 10 Biggest Mistakes Sellers Make When Selling Their Businesses. Next month, we’ll finish with our last four of the 10 Biggest Mistakes.
