May 17, 2022
Barriers to an “ELITE” Exit and Why Most Businesses Don’t Sell
When it’s time to sell your business, you want to maximize the transaction value on your terms and without regret. Unfortunately, most business owners never get there. Here are some of the reasons why.
Over the past decade, I have helped many business owners achieve elite exits. I have also seen business owners fail to achieve the exits they desire. These failures have occurred for several reasons, and here are 10 to watch out for:
1. Not knowing how much you need from the transaction
Many deals have fallen apart because the owner didn't really understand how much money they needed to get. Formal financial planning can give you a better understanding of your post-exit cashflow.
2. Failure to understand non-compete and non-solicit
Many people want to sell their company and then consult or start a new business in the same industry. Most buyers are going to want provisions that prevent you from competing against them.
3. Errors in representations, warranties or indemnifications
This is a very large stack of legal documents that talk about how you are representing the company to the new owners. Get this wrong, and the deal could fall through.
4. Due diligence issues
Once you enter due diligence, the buyer is looking at your company with a fine-tooth comb, trying to find all the things wrong with it so that they can pay you less. Your job is to protect the value that you've negotiated by minimizing any uncertainty related to future cash flows of the business.
5. Being held hostage by key employees
This can arise when key employees have leverage over you. They may ask you for more money or for a piece of the deal. This can cause serious problems, especially if they communicate with the new owners.
6. Lack of competition
You might get an unsolicited offer and think it's pretty good, but the buyer could have a big negotiating advantage if there’s nobody else waiting in the wings. It’s preferable to work with M&A professionals who can generate multiple bids.
7. Inability to control emotions and make clear decisions
Owners often get confused, upset and stressed out. This is one of the biggest transactions of your life. You need to control emotions and having an experienced exit team around you can help you clarify your thinking and keep you on track.
8. Personality conflicts
As you get into the fray of negotiating, it's easy for friction to manifest itself. In most cases, the buyer is just doing the best thing that they can for their future ownership of the business. You need to remember that it isn’t personal.
9. Not adequately vetting the buyer
Sometimes you get an offer then realize the buyer has not arranged outside financing, expects you to finance the sale in the form of a note or expects to pay you out of future earnings if the company hits certain milestones. This is another good reason to have professional M&A advisers on your team.
10. Revenue decline during the sales process
Selling your business can be all-consuming, but you need to share updated financial statements with the buyer throughout the process. Don’t take your eye off the ball and risk your purchase price.
Every business is different and there are lots of special cases out there, yet certain principles are nearly universal. Along with my colleagues in law, accounting, mergers and acquisitions, financial advisory and business valuation, I help business owners leverage those principles to maximize their opportunities.
Remember that elite athletes don't practice on game day. When they walk onto the field, they have already gone through elite preparation. If you are going to have an ELITE exit, you need ELITE preparation in order to maximize the transaction value on your terms and most importantly, without regret.
