Common Mistakes of Sellers
Michael Cohen
You have spent years building a successful company. The company is profitable and still growing. You have other life interests to pursue (travel, family, hobbies, etc.). What are some of the common mistakes business owners often make at this time? 1. Waiting too long before deciding to sell – Indecision, waiting for a compelling reason to sell, or complacency can cause you to miss the optimum timeframe to sell your business (see related article “Best Time to Sell a Business”). Waiting too long can impair value and also deny you the benefits of selling your business (wealth diversification and more time for other interests). Also, it is important to realize that the sale process can take a full year to complete and if your desire is to exit the business your services may be needed for another year or more to complete an orderly transition process. 2. Conducting a “limited” or “exclusive” sale versus a “managed” auction - Managed auctions usually produce multiple viable offers, or options, allowing you to choose the combination of price, terms, buyer, and transition scenario to suit your personal values. A “limited” or “exclusive” sale both limits your options and also provides the prospective buyer with undue initiative in formulating a transaction, almost always resulting in a sub-optimal offer. Still, too many sellers are seduced by the party, friend, or competitor that has expressed interest in buying the business for many years, only to suboptimize their potential transaction by being reactive rather than proactive. When these self-proclaimed buyers are run through a managed auction, they are rarely selected as the ultimate buyer for the business. 3. “Flying solo” as opposed to engaging an investment banker – While directing the sale process yourself day-to-day may seem cost effective, it usually results in lost confidentiality, incomplete preparation, ineffective marketing materials, lost time, negative impacts on the business, and poor end results. Financial and strategic buyers are usually highly experienced and sophisticated acquirers. An investment banker will help you level the playing field, maintain confidentiality, insulate your employees from the process, ensure effective preparation and marketing, create a valuable buffer between you and the buyers, and maximize your results. 4. Inadequate preparation (adjusted financials, buyer research, etc.) – Advance preparation is crucial to induce multiple serious buyers to go thorough the process of reviewing, valuing, and making competing offers in parallel. Proper preparation by an outside expert creates a sense of urgency and an atmosphere of competition among buyers seeking to acquire the business. Preparation includes making clear and justifiable adjustments to historical financial results, detailed financial forecasting, data room assembly, development of effective marketing materials, and crafting a thoughtful list of prospective buyers. 5. Poor packaging and presentation materials – Distilling, documenting, and communicating the key factors that have made your business successful is an art. Translating your strategy and business results into the corporate finance language of strategic and financial buyers is essential in developing effective marketing materials. 6. Lack of a proper Data Room – The Data Room brings all of the material physical or electronic documentation on the business into one controlled location for timely review by prospective buyers. The Data Room is also your opportunity to provide all necessary disclosures about the condition of the business upon sale. A properly prepared Data Room is essential to save time, facilitate competition for the business, and ensure legal documentation of the transaction. 7. Ineffective marketing – A comprehensive buyer list and effective communications are essential to maximizing your transaction. Initial contacts are made using blind materials to protect the identity of the company until interest and capability are confirmed and a Confidentiality Agreement is executed. The Confidentiality Agreement is often

Copyright © 2008 Michael Cohen. All rights reserved. Electronic redistribution by email is encouraged.

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individually negotiated with each buyer. Once established, covered buyers should be provided with carefully prepared information designed to promote their interest in and guide their view of value for the business. 8. Compromised confidentiality – Maintaining confidentiality is important both internally to avoid employee distraction and externally to shield customers and competitors from the knowledge that you are considering a transaction. Engaging a professional intermediary will provide you with a layer of anonymity and some controls that would not otherwise be available to you if you go “solo.” 9. Under-reporting past profits (for tax purposes) – Privately held companies are usually managed to minimize taxes, which runs contrary to the objective of maximizing value upon sale. The solution to this dilemma is to recast your historical financial results using clear and justifiable “adjustments” to present your results in the most favorable light possible. Buyers understand this issue and they expect to see appropriate financial “adjustments.” 10. Failing to disclose everything material to the buyer early – The Data Room is your opportunity and the best time reveal all material information about the business. Waiting until late in the process or not disclosing material information can weaken credibility, undermine your negotiating position, or result in a significant liability. 11. Granting exclusivity too early in the process – Buyers typically strive for exclusivity early in the process. However, granting exclusivity too early diminishes the seller’s negotiating advantage. Conversely, reluctance to grant exclusivity at the right time can discourage an experienced buyer from proceeding. Exclusivity may be valuable late in the process, once the price and key terms are agreed, to compel a serious buyer to increase legal, accounting, and due diligence resources to expeditiously close the transaction. Knowing when to grant exclusivity, under what terms, and how to communicate this to prospective buyers requires judgment and experience. 12. Selecting an offer solely on the basis of price – There are many other valuable features to an offer in addition to the price. Certainty of closure can vary greatly from one buyer to another. Some offers contemplate significant deferred or contingent payments. Deal terms that may have value include (a) the amount and duration of any escrow, (b) the extent and duration of indemnifications from the

seller to the buyer, (c) commitments and limitations affecting the seller, etc. The identity of the buyer and the scenario may be important to the seller. For example, is it a financial buyer that will retain all the employees and continue to grow the company? Or, is it a strategic buyer that intends to move all the work to another location? Sometimes entrepreneurs will accept a somewhat lower price for their business to allow the business to continue in its current location with the same workforce that made the business successful. Also, different buyers may require varying degrees of ongoing personal involvement by the former entrepreneur/owner, family members, or management team which may or may not resonate with their personal goals. Knowing the common mistakes of sellers can help you and your representatives avoid potential pitfalls when selling your business while achieving your personal goals and maximizing your results. For more information, contact any Principal at Global Capital Markets, Catalysts for Corporate Finance: www.GlobalCapitalMarkets.com Michael Cohen is a Principal at Global Capital Markets. Previously, he led strategic acquisitions and divestitures at Honeywell International and made equity investments at Norwest Equity Partners, Norwest Venture Partners, and 3i Capital. He earned an M.S.E.E. from Drexel University and an M.B.A. from the Wharton School of Business.

Copyright © 2008 Michael Cohen. All rights reserved. Electronic redistribution by email is encouraged.

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