Knowing the Best Buyers for Your Business and Common Seller Mistakes
By Jack Lyons
President, Lyons Solutions LLC
Selling your business entails a mix of many factors – knowledge, art, information, psychology and expectations. Fumbling over one item in an incredibly complex process may blow a one-time chance for the perfect transaction. But when everything goes well, the result is wealth creation from the years of hard work, blood, sweat, tears and courage you've contributed to start and/or grow the business of your dreams. In the last 30 years, Lyons Solutions has had tremendous success representing seller-clients. We've also gotten inquiries from business owners who were stumbling through or had failed at the sales process. And those who were wondering what might have gone wrong and what to do next. So we've decided to highlight the most common mistakes and pitfalls to avoid in selling a business.
MISTAKE #1: Knowing the Best Buyers
Many business owners think they know the most likely buyers for their companies based on who has approached them or who is rumored to be looking to buy. Our experience has been very different. Seldom is the buyer for our seller-client a company the business owner identified as the most likely candidate. In fact, very often we’ve helped business owners sell companies for significantly more money than the likely buyer was willing to pay. The most aggressive buyer today may not have been in the market yesterday and may not be an aggressive buyer tomorrow.
So how does one achieve the best premium in pricing? By taking off the blinders; by thinking out of the box; and by leaving no stone unturned. All buyers who have approached the business owner in the past or have called on a regular basis should be considered. However, business owners also need to consider a wider range of possibilities to find a premium buyer (a buyer offering a combination of the best price, transaction structure and fit).
When establishing your list of best buyers, consider asking the following:
- Who might be a strategic fit from within the industry?
- What private equity groups are seeking a platform or an add-on acquisition in your industry?
- What companies have the same customer base, but have a different product or service?
- What companies seeking entry into your market or location would value your organization and reputation?
MISTAKE #2: Having a Fixed Asking Price
Many business owners believe it is necessary to have a fixed asking price for the company because they think buyers want to know what pricing the owner has in mind. While it is true that a business owner considering selling their company will have to address the question of asking price, having a fixed asking price is a serious tactical mistake. If a potential buyer knows the asking price, what incentive would there be to pay a higher price if a lower price is acceptable to the seller?
In our experience, when setting an asking price, you set a ceiling on what a buyer may pay. Although, professional merger & acquisition advisors rarely set an asking pricing. They let the buyers set the price utilizing a proven competitive bid process. Experienced buyers can always determine what they’re willing to pay on their own.
Buyers understand that if they pressure a seller about what they’d accept for the business, most novice sellers will give in. Some business owners compensate for this by establishing an asking price that is so far out of line that would-be buyers quickly back away. No buyer wants to deal with a seller who has unreasonable expectations. Most buyers will assume that an unreasonable asking price means that the business owner could also be impossible to deal with.
Not setting a fixed asking price becomes a matter of trusting the acquisition process and your advisor. If there are enough potential buyers in play, a premium buyer can usually be found.
MISTAKE #3: Taking the Easy Way Out
A number of business owners are afraid or don’t have the time to market/shop their companies to a broad enough selection of buyers to receive multiple offers. Many business owners don’t want a large number of people knowing that they’re considering a sale because they‘re afraid of the potential impact of rumors on their employees or customers. Other owners are unwilling to delegate this task to someone else or are uncomfortable approaching prospective buyers they don’t know. As a result, the owner will typically only talk to a handful of “friendly” potential buyers. No competitive pressure is brought into play. And without competitive pressure, buyers normally buy at lower prices and get better terms than would happen in a competitive sale situation.
Many business owners naively think that as long as only a few buyers know about the opportunity, confidentially is assured. Damage can be done starting at the moment the business owner indicates an intention to sell. It’s always best to obtain a signed confidentiality agreement before having any conversation about a possible sale. Inexperienced business owners often times reveal their intention to sell and have a serious conversation with someone they consider a potential buyer without having that party sign a confidentiality agreement to protect their interests. What’s to stop this person from starting a rumor about the potential company for sale? Nothing!
MISTAKE #4: Buyer Visits
Buyers love to visit potential sellers, so business owners will get requests to come visit and tour the company from practically every buyer. Why invite a buyer to visit unless you know the pricing and terms they anticipate offering? In our sales process, we selectively invite no more than the best 2 or 3 buyers to visit our client. Most times, we arrange for the visit to occur off-site or after-hours. The significant amount of time used by the busness owner and the confidentiality risk associated with every visit should be key items to consider.
MISTAKE #5: Premature Disclosure of Information
Many sellers will give a potential buyer anything the buyer asks for (including sensitive financial, organizational, customer, employee earning, product and/or service processes/secrets, and strategic information) without the buyer being truly committed. It’s always a good idea to work cooperatively with the would-be buyer to answer critical questions and concerns, assuming that the buyer is qualified and interested and a confidentiality agreement has been signed. Notice the highlights. Each is important. Determine the validity of all of them.
Following is a set of good rules-of-thumb:
- Disclose any negative news right away.
- Do your homework to qualify the buyer.
- Make sure the buyer is committed.
- Disclose confidential information as late in the acquisition process as possible.
- Move the transaction along as quickly as possible after signing a Letter of Intent; if the transaction can’t be closed quickly, you are far better off looking for another buyer.
- Remember that the Letter of Intent doesn’t bind the buyer to complete the transaction or to complete it on the same terms as spelled out in the Letter of Intent.
- Don’t try to do everything yourself – know when to seek qualified help.
If you're thinking about selling your business and would like to discuss your situation and options confidentially, contact Jack Lyons at (941) 497-4700.
© Copyright 2014 Jack Lyons. All Rights Reserved.