Are you aware that only an estimated 20–30% of companies brought to market actually sell? To increase your odds of success, it is essential to be educated, realistic, and committed. As you consider selling your business, you need to understand common pitfalls and preventable mistakes that derail transactions.
1. Inconsistent Financials
Most businesses under $30M in revenue have poor financial records that don’t comply with basic accounting rules. Companies often report on a cash basis, which does not convey the real-time financial condition of the company or working capital needs. While basic bookkeeping is generally sufficient to file tax returns, poor financials will inhibit successful M&A transactions. Buyers scour financials more than any other factor, and poorly kept books are a red flag. As professional buyers look at hundreds of deals per year, buyers will simply move on to the next deal if your financials are not well prepared. For buyers to satisfy their stakeholders, and for sellers to achieve a market (or above) valuation, GAAP (Generally Accepted Accounting Principles) financials are a must.
2. Unreasonable Seller Expectations
Sellers’ valuation expectations are often disconnected from reality. Seller expectations may stem from the “country club valuation” a friend supposedly received. Before going to market, sellers must consult with an experienced M&A firm who will normalize financials to properly reflect adjusted cash flow, provide data on comparable company sales, and provide guidance on probable deal terms. Sellers must appreciate that buyers assess value across quantitative (financial) and qualitative (team, industry trends, etc.) dimensions. Don’t waste your time pursuing a sale unless you’re comfortable accepting probable market value and terms. Before Kinected accepts a client, we ensure that all three “legs of the stool” are well supported: the business is performing well, the owner is financially prepared (can afford to sell), and the owner has a personal post-retirement plan.
3. Surprises Uncovered During Due Diligence
Buyers expect sellers to be transparent and present “the good, the bad, and the ugly” up front. When a buyers discover a previously undisclosed issue during diligence, they lose trust in the seller and question what else the seller might be hiding. I once had a $100M strategic buyer walk away when they discovered the seller had been employing undocumented workers. The seller didn’t think this was worth mentioning to me or the buyer! Marketing materials must disclose key issues, perceived risks, and mitigation plans.
There’s an old saying in the M&A world—time kills all deals. The longer a deal drags on, the more likely the level of interest or valuation expectations change for one or both sides. Sellers lose key customers or employees. Buyers find another deal they prefer, or their lender increases borrowing costs. Delays are common as third-party specialists are introduced to the process. To get a deal done, both sides need to maintain open and honest communication throughout.
5. Not Having Advisors with M&A Experience
It’s imperative that sellers engage advisors with M&A experience. This team includes the CPA, CFO, corporate attorney, wealth manager, and M&A Advisor, who serves as deal quarterback, handling day-to-day deal activities while you continue to run your business optimally.
As you consider selling your business, we encourage you to speak with an experienced M&A advisory firm that can increase the odds of your transaction closing successfully. Kinected Advisors has an 84% success rate in our transactions, well above the 20-30% industry average. We would love to speak with you about getting you the best possible deal for your business.
Kevin Berson is an M&A Advisor with Kinected Consulting, based in Los Angeles. He specializes in helping business owners maximize outcomes in selling their businesses. He is also the founder of Kinected, a Management Consulting firm that advises companies with strategic planning, exit planning, and merger and acquisition diligence. Kevin can be reached at firstname.lastname@example.org.