Recently, we looked at the number one reason why M&A deals die—poor financials. Now we’ll explore common seller misconceptions about the M&A process that can lead to costly mistakes.
Seller Perception: “Buyers will value my business based on its potential.”
The reality is that, for most established businesses under $50M in revenue, buyers make offers based on past performance. How a business has previously performed is seen as the most likely indicator of future performance. If you couldn’t capitalize on this “potential,” why would a buyer pay you at closing for earnings you were unable to generate?
Seller Perception: “We have a signed LOI. The deal is as good as done.”
A signed letter of intent (LOI) is a significant step towards closing, but the deal is far from done. For a seller, due diligence is often the most challenging and stressful stage of the deal process. Your deal team will help you navigate the emotional peaks and valleys, but brace yourself—this is the phase where “most deals need to die three times before they can be completed.”
Your leverage as a seller is highest before the LOI is signed. Afterward, the bidder who had previously been courting you now engages experts to find items to justify a price reduction, sometimes to the point where their findings or attempted renegotiation kills the deal.
Seller Perception: “My business will be valued on a multiple of revenue.”
Unless you have compelling IP or generate substantial recurring revenue, most businesses under $50M in revenue are valued as a multiple of cash flow or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). While there are certainly exceptions, most businesses between $5M–$50M in revenue sell for four to eight times EBITDA.
Seller Perception: “I don’t want to sell to private equity, as they will gut my company.”
Private equity firms want to continue an acquired company’s previous success, so they are mindful of the team and strategy employed by the seller. If anything, PE firms tend to increase staff, as departing business owners frequently played multiple roles in the business. PEs are often ideal buyers for businesses generating at least $1M EBITDA, because they are experienced, well-capitalized, can move relatively quickly, and can offer sellers significant upside.
Seller Perception: “I don’t need to run a process—I already have a buyer.”
You know your business better than anyone, so you may assume that you know your perfect buyer. However, you may not realize that several potential buyers could end up competing to buy your business. Fixating on one buyer/type limits your options. Having an M&A advisor target an expanded buyer pool will increase your probability of a successful sale and create leverage. When you have only one buyer in play, that buyer feels no pressure to keep the process moving or pay a premium. I commonly say: “When you have one buyer, you have no buyers.”
Seller Perception: “I can sell the business myself.”
As an entrepreneur, you successfully negotiate with suppliers, customers, and employees all the time. However, selling your business is very different. On the other side of the table is likely a professional buyer who has completed several dozen transactions. Without the support of an experienced M&A team, the cost of making a mistake or the amount of value left on the table can be substantial.
The fees associated with your deal team (M&A advisor, attorney, and CPA/ CFO) can seem high, but they will pay for themselves (often many times over) by the end of the process in terms of the additional value they bring. Just as your surgeon, pilot, or electrician would tell you — sometimes you need to trust professionals.
As you consider selling your business, we encourage you to speak with us. Kinected Advisors has an 84% success rate in our transactions, well above the 20–30% industry average. We can help you get the best possible deal for your business.