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8 Things To Avoid When Selling Your Business
- Never give out financial or proprietary information to anyone without the interested party signing a comprehensive "Confidentiality Agreement". This agreement should also contain provisions, which protects you from the interested party doing such things as poaching customers, suppliers or employees. If you have a proprietary process or formula that is secret, keep it secret until the transaction closes, and the money is safely in your bank account.
We once had a client whose secret process was the envy of his customers, and which made him a great deal of money, thus making the business worth a Prince's ransom. One day over lunch with his largest client, one bottle of wine too many, and he provided a tour of his facilities to his "new found friend". Within two weeks, that customer had sourced the equipment in Germany, chartered a Boeing 747 and flew in the equipment, set it up and stopped doing business with the client. The bank subsequently appointed a receiver to liquidate his business. - Always take the time to qualify the "financial capability" of the interested party, and avoid providing any information until you are confident the buyer has the financial capacity to complete the transaction. Your accountant or banker can help you determine if the interested party has sufficient equity to qualify for a bank loan. Someone who wanted to retire from his business contacted us recently. He had just cancelled a "Letter of Intent" with a buyer who was unable to finance the acquisition. Subsequent investigation revealed that he had virtually no equity and had "shopped the deal" to more than 40 financial sources. The process had taken over 9 months, and needless to say confidentiality was somewhat compromised. The Sellers had incurred significant legal fees as well as accountant fees for tax advice.
- Avoid making "Reactive Decisions"! Plan ahead, and have a competent third party provide you with a written valuation of your business. Failure to do so will result in you second-guessing whether or not the offer is reasonable, resulting in declining a perfectly good opportunity.
Recently a business owner came to us to sell his business. He told us he wanted $2 million for it. (The book value was $250,000 with an EBITDA of $125,000). When asked how he determined it was worth $2 million, he said that he just turned down $1.2 million because he felt it was worth $2 million. When told that traditional valuation methods would set the value between $500 and $600,000, tears came to his eyes as he realized that he had turned away an outstanding proposal. - Never provide an "asking price". A competent buyer will know or have access to people who do, how to value your business. If you set the asking price too high, no one will buy, and if you set it too low, you will leave money on the table. The reason the buyer is buying, and the paradigm from which a buyer is viewing the business will result in a different value from each buyer.
We represented a client whose business was valued at $900,000 for shares. Four offers were received from four serious buyers, all qualified to know what the business was worth to them: 1.3 million; 1 million; $650,000; and $400,000. Each had different terms and conditions, with the best offer being the one for 1 million Dollars. - Never sign anything that your lawyer hasn't reviewed in detail.
There was a recent case wherein the simple addition of a comma, had a $2.5 million dollar impact to value of the transaction. - Never sign anything until your accountant has reviewed the "tax impact" of the proposal. A simple allocation change, or a change in the structure can save hundreds of thousands of dollars.
We were once involved with a transaction where the initial estimate of income tax due from a transaction was close to a million dollars, and after the tax accountant made a number of recommendations, the tax bill was reduced to approximately $85,000. - Avoid negotiating directly with the interested party. Always try to be the "Higher Authority", that the negotiator must go for a final decision. During the heat of intense negotiations, emotions can run high, comments are sometimes made which are later regretted, and those comments can often destroy a perfectly good transaction. A competent Intermediary will not be emotionally involved and should be able to maintain a cool level business head during the negotiations and between the parties.
We were called in to sell a large retail chain, and learned that the owner had been in negotiations with a large competitor. The opening offer made by the competitor was quite low and the Seller made known his feelings about the low offer and what he thought in no uncertain terms. The transaction died. Research indicated to us that this competitor would truly benefit from completing this acquisition and in less than two hours we were able to obtain an acceptable offer. - Maintain confidentiality at all costs. Failure to do so can easily result in the loss of key employees, customers or important suppliers.
Recently, a close friend of mine was the victim of a rumour that said her business was for sale. It wasn't. She lost 2 key employees within weeks, and the reason given for leaving from both employees was "they had financial obligations and couldn't afford to run the risk that a new owner would not keep them".
