M & A Matters: October 2014

Your business likely represents a major portion of your net worth. Before you sell your business, team up with an experienced mergers and acquisitions advisor. He or she will help you get the best price for your company and steer you clear of the pitfalls that could cause you to lose the value of your life’s work. Here are four mistakes that are easily avoided when you have professional advice.

Mistake #1 – The earn-out error
A company comes to you with an offer to buy your business. They tell you what a great job you’ve done and what a great company you’ve built.  Then they tell you about their company – they wine you and dine you and maybe even fly you out to their corporate headquarters. You begin to get comfortable with them. They seem like good guys. Then they make an offer with a very strong price, but with one hitch. Most of the purchase price is an “earn out” – paid to you only if your company reaches certain performance goals going forward. This kind of arrangement may be acceptable if you get the bulk of the purchase price, let’s say 70 to 80 per cent, in cash at closing. But if the numbers are reversed and you get only a small down payment, don’t do it. Even if you continue to run the company for the buyer after closing, you’re not really in control. They call the shots. And if their decisions cause your company not to do well, you’re not going to get paid the full purchase price. It’s that simple.

Mistake #2 – Taking paper that’s not legal tender
Similar to Mistake #1, but instead of accepting an earn-out, you accept stock in the buying company with just a small cash downpayment. This is even more dangerous than the earn-out scenario. In the earn-out scenario, you’ll at least have some control of your company after closing. When you accept stock instead of cash, however, you are completely at the mercy of the buyer. If his company goes down, your stock goes down. And if the market tanks, as we all know it can, the value of your stock tanks as well. And what makes this scenario even worse is that the stock you received when you sold your business will often be restricted – you’ll be prohibited from selling it for a period of time after closing, typically two years. It’s a recipe for disaster. 

Mistake #3 – Talking out of turn
You’ve negotiated a deal with the buyer, the purchase contract is almost finished, the buyer has secured financing and the deal is scheduled to go to closing. You decide to hold a company-wide meeting to tell your staff about the impending sale. But then something happens. The deal is called off. Now what?  Now, your employees, your competitors, your vendors and your banker all know that you are trying to sell. Your employees get nervous and start looking for other jobs, your competitors tell your customers that you’re going out of business, your vendors put you on COD and your banker calls in your line of credit. It’s a nightmare scenario which, with the proper advice as to how to maintain confidentiality, could easily have been avoided.

Mistake #4 – Friends like these
You attend a seminar where a company promises to sell your business for three, four, five or even ten times its true value.  Back away – don’t get sucked in. This is actually a very sophisticated scam. Companies like this put on slick presentations, but are really only interested in collecting big up-front fees, not in actually selling businesses. They claim they can create a “frenzy of buyer interest” that will “skyrocket the price to stratospheric levels.” Don’t be fooled. It’s all smoke and mirrors. They want to get you excited and then stick you with a $30-50,000 up-front fee. And then, good luck getting your phone calls or emails returned. Don’t learn the hard way. If it looks too good to be true, it probably is. Stick with a reputable broker who is willing to earn his or her success fee only when the sale of your business is completed.

You are an expert in running your business. But you’re not an expert in selling businesses. Most business owners aren’t – they simply don’t have any experience with the process. Just as providing your product or service requires specific experience and expertise, selling your business requires a specific, but different, set of experiences and expertise.