By Sharon Heaton, CEO of sbLiftOff
Selling a company is not just a financial transaction. For most people, the sale of their company represents the single largest financial transaction of their lifetime.
Most owners have been raising their company as long as they have been raising their children. As a result, the sale of your company comes with strong emotions.
According to a recent article in the Harvard Business Review, the vast majority of business sales in the middle market never close. As the CEO of a lower middle-market mergers and acquisitions (M&A) advisory firm, I believe part of the reason comes down to an inability to develop the depth of trust and transparency that is required to close a major business transaction. Managing buyers’ and sellers’ emotions is a large part of the challenge.
Owners going to market understandably worry: Will my employees like the new owner? Will my customers continue to get the same level of service? Will the corporate culture that I built endure? Even after an owner makes the difficult decision to sell, there are additional emotional tests. The valuation an owner receives often feels more like a report card than a nonemotional start of negotiations. If the deal goes under exclusivity, due diligence can be painful. “Do they want to know the color of my underwear?” one of my clients recently complained. For many companies, there might also be a quality of earnings report. These quality of earnings reports are regularly likened to proctology exams.
If you have ever tried to sell your company, gone under a letter of intent — or even gotten as far as a sales and purchase agreement — and your deal goes sideways, you know that a broken deal costs more than wasted time and heartache. A broken deal can lead to loss of confidential information, loss of trust by key employees, and a loss in earnings or company value. If owners become preoccupied with the sale process for months and neglect the day-to-day operation of their company, the financial toll of a broken deal can be significant.
So how do lower middle-market owners avoid broken-deal syndrome and capture that happy dopamine high — closing a deal with a well-capitalized, culturally appropriate buyer?
M&A is a team sport. No one should take on the emotional and execution challenge of M&A alone. Even if you have built your company from scratch, and achieved enormous success by doing things your way, rugged individualism will not serve you well when it comes to M&A. The owner who believes by sheer will power they can bend the market to meet their personal price expectations is the owner who will fail.
In addition, the owner who believes that even though they have never closed a sell-side deal in their lifetime they will magically perform this act solo, maybe with a lawyer as a sidekick, is in for a rude awakening. I recall the brilliant female entrepreneur, an astrophysicist, who built her company from scratch and then decided she alone could sell it. She called up all the businesses in her space saying she was ready to make a deal. Word got out she was desperate. The valuations she got were fire-sale worthy; the bruise to her brand was considerable.
Selling a business is not like selling a house. When you sell your home, you put a big sign out front and tell everyone you know you are trying to sell your house. In contrast, letting many people know that your company is for sale can reduce its value. Employees and customers get nervous, and competitors think you are vulnerable. Maintaining confidentiality in M&A even before the transaction begins and all through the process is very important.
There are other steps you can and should take to ensure success.
Start by determining the importance of your employees: Will some employees represent a key value for buyers? If so, establish non-solicitation and noncompete agreements with key employees to the extent possible. It is important to get these in place before going to market.
Have an experienced M&A lawyer, accountant or tax advisor review your company’s financials, customers and revenue projections to help you see your company from a buyer’s point of view. Before, during and after a transaction, make sure you think about the transaction from the viewpoint of all the relevant players, including the buyer’s financing source.
Would you buy your company? Would you finance this transaction? What risks do you see? This empathetic approach reduces surprises and saves time. And, as any M&A expert will tell you, the two things that kill deals are time and surprises. Thinking like the other party is likely to give you insight as to what they will want and when they will need it before they close the deal.
Expect to feel anxious and try to keep your ego in check. Don’t equate a sales price or due diligence questions to criticism. Remember, every company, including yours, has strengths and challenges. Do not be offended when buyers or advisors point out challenges.
Finally, get strong M&A advisory help to take your company to market. Prepare yourself to hear what the market says your company is worth. In my opinion, it has never been a better time to sell if you have the drive and the right team around you to execute the deal of a lifetime.