Selling your company can present a winding maze of important decisions and unforeseen considerations. Often the excitement of a potential deal can overshadow some of the underlying complexities that are essential to consider for the deal to run smoothly and for you to achieve your desired outcome.
Here are four common myths about the deal process that can inhibit a deal’s timing and get sellers stuck in the maze.
1. Myth – Any money is good money.
Reality – You need to find the right investor or buyer.
When evaluating offers from potential buyers or investors, it may be tempting to accept the highest price without much further consideration. While purchase price is of course paramount, it is not the only part of the offer that should be given significant weight. The goals and expectations of the buyer will have a significant impact on the post-closing business.
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For example, if the buyer or investor is financial, it is important to know when the buyer/investor expects to exit and what that exit might look like. A short window gives you less time to implement your strategic plan. If the buyer is strategic, it is important to understand where you and your business fit into the buyer’s strategic plan.
When we go back to look how our clients have evaluated offers for their businesses, the highest offer is rarely the one selected. It oftentimes is an outlier; a signal that the interested party isn’t as skilled or as prepared as the experienced buyer of companies. Usually there will be several interested parties who submit proposals at the same general enterprise value. The better decision is to select the best fit for your company from these potential buyers.
2. Myth – Once the letter of intent is signed, all the hard work is done.
Reality – The due diligence process can determine the pace of a deal.
Signing the letter of intent is exciting; organizing a company’s records and locating a company’s organizational documents, employment agreements, customer contracts and financial and tax information is not.
A company’s internal organization of its documents can determine a deal’s pace. Most letters of intent require satisfactory completion of the due diligence process, which typically involves review of the company’s documents by the buyer, investor and lenders, before the transaction picks up some serious commitment.
If the information is incomplete, the deal’s pace can slow and be put on hold until the buyer, investor and lenders are satisfied the company’s records are in good order. The bottom line is: proper organization and recordkeeping on the frontend of a deal can save time, money and headaches during the deal.
Business owners are successful for many reasons. Patience usually isn’t one of those reasons. The M&A process is not an intuitive exercise for those not accustomed to it. It just takes time…and patience. It will also be distracting to the owners of the business, and it can be very distracting to senior management. At some point in the process the owners will need to bring senior management into the fray. This creates a management problem for ownership: keeping senior management focused while they reconsider their options and their own best interests.
3. Myth – Purchase price is all that needs to be agreed upon. The rest will fall into place.
Reality – Other material deal terms need to be considered.
Not only is it important to focus on finding an investor or buyer who fits your company’s culture and objectives over choosing the highest bidder, it’s also imperative to negotiate other deal terms at the outset of a proposed transaction. The scope and duration of restrictive covenants (such as non-competition or non-solicitation provisions) should be considered. The buyer may also want to retain you or other executives for employment, consulting or transition services post-closing. The more involved role you or your team will have post-closing, the more upfront discussions should be had.
Owners of good companies have quite a bit of leverage in today’s market. We suggest you use it. Buyers are always open to non-economic items that can be used so they are successful in their bid to acquire your company.
4. Myth – Life will resume to normal after the deal is closed.
Reality – There will be a new normal to get used to.
Building your company has likely taken 110% of your time, energy and resources for years, if not decades. You’ve been at the helm, making decisions and determining the direction of your business. Selling your company will change this dynamic. You will have new found freedom, but you will be losing at least some, if not all, control of the business you created.
A client likened the process to sending your child off to college—it is exciting to see your child grow and flourish but disconcerting to know he or she no longer will depend on you in the same way. It is important to develop a transition plan for yourself before the deal is closed to help cope with the change. If you are going to be bought out of the business entirely, consider how you will spend your time. If you’ve taken on an investor, consider how you will manage sharing control.
Many clients quickly dismiss the thought they might be unhappy once their companies are sold. It seems like after the euphoria of the deal passes, clients set off to do things they have been postponing, like dream vacations or reemergence in a hobby. But that renewed focus fades, and fades much more quickly than most expect. Some time and attention should be spent on your own personal exit plan while you think about the exit plan for your company.
There are many considerations and nuances when selling your company. Consulting with trusted legal, financial and personal advisors before and during the process can help you prepare, ensure the deal runs as efficiently as possible and assist you in achieving your desired outcome. After all, you don’t want the sale of your business to be a learning experience; there are no mulligans in the M&A market.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.