Our firm has a tremendous record of home run sales for our clients, achieving great, usually all-cash prices, and very clean deals. We get inquiries often from people who may have just sold their companies, at less than optimum pricing, or from sellers who have stumbled and not consummated a sale, asking our input about what went wrong. Accordingly, the purpose of this newsletter is to try to highlight a handful of the most common mistakes, and the pitfalls to avoid in your business sale. We tried to choose a top 5 in to-be-avoided mistakes when selling a company.
Setting the Price – In selling a company, every owner feels compelled to go forward with a fixed “asking” price for his company. Buyers encourage that mind-set, with an eager inquiry to learn “how much do you want for the company?” It never works to the seller’s advantage to voluntarily set a price for his company. All you do, when you set an asking price, is set a clear ceiling on how much the buyer may pay. Experienced buyers can always determine price on their own, and will certainly do that if you require it.
Inviting too many buyers to visit – Sellers will get requests from practically every buyer they speak with to come visit, and tour the company. If the seller opens the door to such inquiries readily, he will end up giving tours to literally dozens of potential buyers. Before any visit is allowed, the buyer should first set forth the pricing they anticipate. In our process we rarely invite more than 2 or 3 buyers (the BEST 2 or 3) to visit. Every visit opens the seller to confidentiality risk, and requires significant time for the owner. When the process involves numerous visits, confidentiality is weakened, and seller energy is quickly used up for unlikely buyers.
Quick to sign LOI – Buyers who like the company will often very quickly offer a “letter of intent” as the next step before they begin due diligence in earnest. The normal letter of intent makes absolutely no commitment on the part of the buyer, other than to look in more depth to consider purchase, but it requires the seller to commit to exclusivity, agreeing to cease conversations with alternative possible buyers. This does absolutely nothing beneficial for the seller. We typically will NOT accept such a letter, and will NOT agree to exclusivity unless the buyer is willing to commit to a nonrefundable deposit first. If they will do that, they are serious, and will probably close.
Forgetting the fundamentals – If a letter of intent is entered into, it should also lay out all significant terms of the deal. Purchase price alone is not enough. You need to define the transaction to be all cash at close, you need to define required employment terms for owners, and you need to explicitly outline all key elements of the agreement. Until you discuss all sensitive items (like noncompete terms, and related party lease-back of property, and limits for indemnifications) – you really don’t have the fundamental terms of the transaction in place.
Allowing too much time to close – Buyers often ask for excessive time to close. There is virtually no purchase which should take more than 60 days between the initial outline of the agreement, and close. Extended time periods make it harder to control confidentiality, and reduce the probability of closing true to terms outlined. If the transaction can’t be closed quickly, you are far better off looking for another buyer.
Our firm has closed in excess of 95% of the seller transactions we have taken on over the past 26 years. It is not an accident. Early and careful attention to the likely fall-points for any transaction can vastly improve the probability of success!