Monday, May 12, 2014

Common misconceptions about selling a business

[Editor's note:  This eLetter was first published a couple of years ago. It received such positive response that we decided to update it  and run it again -DPM]

  Common misconceptions about selling a business  

It appears that we may be entering the next big surge in business transition activity fueled by the retirement needs of aging baby boomers. The first baby boomers turned 67 years of age in 2012 and we are beginning to enter the years with greatest numbers of boomers. It was estimated that in 2012, based on slow activity in 2008-2011, there were between 1.2 -1.5 Million boomers (with businesses between $2M and $80M in revenue) who would need to sell to provide liquidity for retirement. That number will continue to grow each year. 
If you are a business owner contemplating a sale somewhere in your future, consider these common misconceptions about selling your business.  

       · I know the buyer - they are in my industry.   Many business owners think they already know the prospective buyers - from their industry.  However, in many cases where a sales process is conducted by an investment banker, an "outlier" (either a strategic or financial buyer) surfaces with an offer significantly higher than from those you may know. Many times these come from outside your industry.
·       The market will be better next year.   Procrastination can cost you. Sellers in 1999 or 2007 will tell you that they wished they had sold while the market was hot. In 2014 and 2015 there are more buyers than sellers - this won't continue with the aging demographics of business owners. 
·        I don't want to sell until I have to (Dismal D's).  You want to sell when your business is healthy and when you don't have to sell. Life can take cruel twists and turns. Business owners without a plan can find themselves subject to the "Dismal D's" - Death, Disability, Divorce, Dissenting Owners, Declining market, Debt overload, or just pure burnout. It is hard work to sell your business. You'll need plenty of energy and motivation to maintain performance during the sales process.
·        The investment banker or M and A firm will build value or help create my business strategy. No they won't - that's not their job! A good investment banker can help you yield value, attract a broader market of potential buyers and get a deal closed, but they don't have the skills or background to build value.
Danger point: Some small M and A firms will offer free or low cost strategic or operational services and advice in order to get your sales transactional business, but these are either young, inexperienced associates or people who have not really run a business like yours. They may be very good at selling your business, but what they don't know can hurt you. If an investment banker is offering to help you with your business strategy, you should question why. Stick to investment bankers that stick to their core competency - selling a business.  
·        My lawyer (or CPA) (or Wealth Manager) will help me find a buyer. Finding a buyer is very different than finding the best buyer, the right buyer. Investment bankers do this every day. Most professionals understand what they do well....and what they don't.  Find the right tool for the job!
·        I met a guy in my CEO peer group /My investors know a banking firm.Selling your business may be your most important business decision. Get help in making an informed decision about selecting an investment banker or other professionals such as accountants, tax counsel, and transaction attorneys. Learn about possible (but undisclosed) conflicts of interest, differences between firms, level of expertise that will work on your company, etc.  Have you checked with previous clients that were both successful and unsuccessful? Mead Consulting clients use a checklist of questions to help make the appropriate choice.
·        It only takes 6-12 months to exit a business.  Nothing could be further from the truth. In order to realize the maximum value it may take you 1-2 years to prepare the business, 12 months to do the transaction, and then you may have to remain for 3 more years with the company after the sale. Rushing a company to market without proper preparation will cost you as buyers will discount values for companies without an adequate strategic growth plan, strong management, or a clean review of due diligence issues.
·        Selling will only take some of my time.  The biggest mistake business owners can make is to allow business performance to slip during a sales process. The primary reason for deals to either fall apart - or become heavily discounted - is because of deterioration of revenue and earnings. Business owners can dramatically underestimate the amount of time and energy it will take to both sell the business and maintain performance during the process.

The Mead Consulting Group helps business owners navigate through a successful sales process, including preparation (value creation), selection of the right team (investment bankers, transaction attorneys, tax counsel, etc.), and the sale process itself. We focus on maximizing value and leverage the business owner's and management's time so that they can focus on maintaining business performance. Contact us for more information.    

The Mead Consulting Group has helped over 50 clients prepare for successful sales transactions ranging from $15M to $350M in transaction value. We help companies increase the value of their businesses leading up to a transaction, minimize the things that cause potential buyers to discount the price, prepare to best position the company, and assist the owners in building a  transaction team.
What successful business owners say about us:
 ...We could not have completed the sale of our business without the advice and guidance of The Mead Consulting Group. Their experience was critical in helping us prepare, and endure, the transaction process to a successful outcome. ...Charles M, President, Healthcare IT Company
A successful process is draining and stressful.  The Mead Consulting Group brought the experience and expertise necessary to help our team focus on the critical issues and not get caught up in the multitude of items that can derail a transaction.  Why reinvent the wheel?  We chose to take advantage of individuals who could help us understand the nuances, negotiate effectively, and close the deal. ...  Ken W, CEO, Behavioral Healthcare
...We missed the opportunity to sell our family business during the last upcycle. Mead Consulting helped us grow revenue and EBITDA to record levels and guided us through the selection of a transaction team. Dave Mead and his group provided great counsel throughout the sales process, removing obstacles and firmly encouraging us to a great deal with a strategic buyer that mirrored our family business values. ...Dan M, President, Building Products Company
...I do not know why anyone would attempt to sell their business without Mead Consulting. Since they have owned and sold their own businesses, they understand the challenges of continuing to run the business while trying to sell it. Their experience kept us focused on the right things and they helped keep our transaction team well-aligned during the process. They truly act as the advocate for the CEO and owner, helping to make sure that it was the best deal for the owner. ...Ron T, CEO, Software Business


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  7. I don't think most people would mind having an outlier. The problem is that as you pointed out, most of the time people aren't expecting an outlier. They expect that they already know who or which teams will be interested in purchasing their business and for what amounts. That kind of limits their possible earnings since from the start, they limit their asking price to what they think buyers will pay.

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