The #1 Reason Business Sellers Leave Chips on the Table
We asked seasoned exit planning professionals how to avoid leaving wealth behind when selling a company. Their answers educated and inspired us.
I recently attended the Exit Planning Institute (EPI) annual conference. Besides the great presentations and the networking, I was fortunate enough to connect with a number of seasoned exit planning professionals.
I couldn't help myself and had to ask them the key question I always get asked:
In your experience, what is the most common area that owners fail to address prior to their exit that results in them leaving the most chips on the table?
I got some great responses from these experts, so I thought I'd share them with you. Here they are.
"In my opinion, the #1 mistake is allowing too little time to get ready. A well-planned exit strategy is a three to five year disciplined process. The actual liquidity event is simply an outcome and the probability of success increases dramatically if the owner and their advisors follow the discipline. Owners (and advisors, in many cases) underestimate the complexity and overestimate the readiness. This has a cascading effect and negatively impacts all the dimensions of an exit. There's no question that rushing leaves money on the table."
"One of the greatest errors I see business owners make is failing to put systems in place to make the business less dependent on the owner/founder. A business that is overly reliant on the owner can be a great risk to potential buyers because of the fear that a new owner will not be able to maintain the relationships the current owner has with customers and vendors, and that the new owner will not be able to replicate the operations the current owner manages. Making the business owner less vital to the operations of the business is a great step toward building the value of a business in the eyes of potential suitors."
"The failure to properly plan in general is the main culprit but, in my experience, most business owners are convinced they can do just about everything including successfully selling their business to an unrelated 3rd party. The advantages an M&A professional brings to the table are substantial and their presence allows the business owners to concentrate on running their business. In addition, owners aren’t properly identifying strategic versus financial buyers. Strategic buyers typically are willing to pay more, often substantially more, for a business that provides some synergies to their company with regard to accessing new markets, customers, or products that can be considered complimentary to their products. We do not typically put a "list price" on a business in order to account for both strategic buyers and financial buyers. We would rather let them put a value on the company to be sold based on each buyer’s unique situation."
"One of the biggest mistakes that is commonly made in M&A transactions or the transition of ownership in family held businesses is the failure to determine the fair market value of the business life insurance."
"There are two problem areas. Number one is not starting early enough to properly prepare the business for sale. Most owners do not realize the significant amount of potential value in their businesses if they took the time to mitigate obvious risk factors that allow a potential buyer to discount the value/price of the business such as account concentration, having an effective management team, having accurate financial reports that have been reviewed by a competent CPA firm, and taking time to improve financial performance of the business. Number two is having a professional team of advisors who can provide specific advice on the anticipated value of the business, the structure of a deal to increase the after tax proceeds to the seller, reduce or eliminate tax liabilities of the sale, facilitate the necessary negotiations of the definitive purchase agreement that, when properly done, can increase the amount of cash at closing, reduce financial risk of seller notes or earnouts, and reduce future exposure of warranties and indemnification for the seller."
"Not really knowing what the net of a sale will bring and not understanding the process or all of their options because they do not ask enough questions prior to the sale or even before they get to listing the business."
"Business owners don't appreciate the return on investment (ROI) in implementing a well-thought out and proper value enhancement program when selling their business. Buyers will pay more for a company with financial and operational transparency. Like selling a home, you want your business to show well."
"The most common area is the lack of having a plan at all, but that covers a multitude of issues. If I had to choose the most common single area that I have seen it is concentration in either suppliers or customers and overconfidence in the relationships the seller has with those parties. Owners tend to be overconfident in their relationships with these parties because they have had them for a long time. Mid-market owners typically do not have long-term agreements or, if they do, there is change of control clauses allowing the third party to exit on a sale. Buyers are wary of their ability to continue these relationships and owners are hesitant to divulge the fact that they are considering a change in ownership. This can lead to lower valuations and can cause a significant issue if a third party refuses to cooperate. The buyer may reduce the offer, putting the seller in a corner."
"In reviewing our experiences with business owners we find two significant areas that owners fail to address, which impacts the value of their businesses. First of all, not knowing the true value of their business is a critical item. In the absence of a base line valuation, the entrepreneur is not able to measure whether he is creating value in his business. This resulting lack of focus on value creation can greatly impact the ultimate transaction value of the business. In addition, the absence of a realistic understanding of the business value can create a barrier to entertaining otherwise reasonable offers for the company. Specifically, one client received a very good offer from a synergistic buyer, but countered with a much higher amount based on an inflated perceived value. The buyer lost interest and a few years subsequent to the initial offer, competitive market pressures drastically impacted business depressing the value of the company below the original offer amount.
"The second significant issue is the fact that many business owners fail to replace themselves in their businesses. In this situation, the owner continues to assume a significant multi-tasking operational role with the company rather than hiring additional management or administrative personnel. The inability to delegate impacts the ability of the owner and, as a result, the company to formulate strategic plans and actions which can have an impact on enterprise value. The impact on value is due to potentially missed operational opportunities, the failure to create management team depth and enhanced overall business risk; all factors that will suppress value."
Experience is the best teacher and I sure learned a lot talking to these guys. Here's my five takeaways so you don't leave chips on the table when planning your exit:
- Plan and start the process early.
- Lessen the reliance on the owner by putting systems and people in place.
- Understand how buyers determine value and determine a base value for your business.
- Engage the right advisors to assist you. You can't afford a learning curve.
- Watch out for customer and supplier concentration.