Selling a business is harder than buying one. During the long process of selling, with the buyer kicking the tires in interest, the seller may find it hard to resist dropping the price as flaws and shortcomings become magnified. But whether the owners are keen to sell or not, their top concern will be to get the best price. In fact, according to a Crosbie recent survey, the leading concern for owners selling their companies was failing to get maximum valuation.
Why are prices adjusted downwards during a sales process? Here are a few common reasons about why sellers may get a less than top valuation:
1. My time is limited. Owners who have sold their businesses often complain about how long the process can take, and how it takes time away not only from customers, but from helping their teams keep operations running smoothly.
Gordon Forsythe, president of Compass Capital Corp. and buyer of companies, emphasizes the importance of knowing what you're getting into. "Ideally, it would be beneficial for individuals who are considering selling their companies to understand how disruptive the sales process is to the day-to-day operation of their business," he says. "The sales process typically becomes an all-consuming effort and unfortunately diverts attention and focus that is required to effectively operate the business."
2. I am the smartest guy in the room. The mergers and acquisitions process is not something typical owners have done before, or if they have, it's not their expertise. Owners often fall into the trap of thinking they are the best person to sell their businesses when in fact they should be focused on continuing to run the business.
A mismanaged sale can have several ramifications, says Mr. Forsythe. "If employees begin to fear for their positions, they may retreat into self-preservation mode, and negatively affect the productivity and direction of the company. Likewise, clients may see this as an opportunity to re-evaluate their relationship with the company and look for alternative suppliers. If the purchase fails to transpire, the company may have wasted considerable resources, which would have been better spent growing the business."
3. Let's sell the whole thing. Sellers who investigate whether parts of their businesses could be carved out of the core and sold separately are sometimes able to spin off a division. They can take this additional capital and re-invest it into a growth strategy or use the liquidity to pay out a family member, partner or shareholder, for example, who wants out of the business. There's no need go with the 'all or nothing' sales strategy.
4. A bird in the hand. Along comes a large, brand name company that wants to buy the business. If the first thing that comes to mind is "here's a good offer, might as well take it as I may not get something like it in the future," think again. When the seller chooses to go through the courtship process without lining up a range of alternative suitors, there's the increased risk of falling in love with the prestige of the impressive big brand name and accepting an undervalued sale price as a result.
5. They should be happy to get us. Every owner thinks that his or her business is unique, and the relationships built with customers and suppliers are special. And though this may be true, the buyer may not feel the same way. Watch out for attitude during a sale, and exercise humility.
Due diligence isn't just for buyers. Smart owners should hire their own corporate finance experts to eliminate surprises that could reduce the sales price. The seller can then be reassured that their house is in order and their strongest features and assets are put forward.
Jacoline Loewen is a director at Crosbie & Company, which focuses on succession advice for family businesses and closely held small to medium-sized enterprises. Crosbie develops customized strategies, particularly in relation to M&A, financing and corporate strategy matters. Ms. Loewen is also the author of Money Magnet: How to Attract Investors to Your Business. You can follow her on Twitter @jacolineloewen.