After a nearly 20-year career in private equity, I’ve learned to appreciate that it takes just as much work to effectively sell a company as it does to excellently buy a company. It’s also easy to slip up or not pay enough attention to vital steps that could profoundly change the final price upon sale.
Sellers make a number of common mistakes during sale processes, including a lack of advance preparation, not knowing key questions about themselves, and not appropriately resourcing the business to concurrently run operations and support a sale process. Each of these mistakes causes sellers to lose credibility and slow down their process, which, in turn, increases real and perceived risk, and inevitably kills value.
To help get better outcomes, here are the three most common mistakes we see made when selling your business and how to fix them:
Lack of Preparation
As a private equity investor, we made it our business to optimize the sale process. We would talk virtually every month about the right time to sell various businesses. When we finally decided it was the right time to sell, we, of course, wanted to be in the market within six weeks of our decision. Even with professional sellers of businesses like PE investors, this decision is often followed by all sorts of scrambling by investors, portfolio company teams, investment bankers, lawyers, and related support professionals to get ready for sale. For family-held or entrepreneurially-held businesses with fewer resources and less experience selling companies, this process is multiple times more chaotic.
Don’t try to squeeze months of work into six weeks: preparing for sale should start well in advance of the sale process. Taking some time in advance will enable you to run an aggressive process while also effectively running your business at the same time.
We recently held a management forum for a top private equity find and their managers, during which we discussed best practices for planning for sale. The key takeaway was preparing for sale should start years in advance, ideally the day the first wire from investors clears, so you can hit the market at any moment when the time is right.
Not knowing yourself before you’re asked
Time and time again on the buyside, I’ve asked fundamental questions that should have been known by the sellers, but weren’t. When we asked these questions, the process had to slow down as their team hustled to find the answers. These slow-downs give everyone in the process time to rethink assumptions and value.
Make sure you know the following key items before you start an M&A process because you’ll most likely be asked these right at the time you can least afford to pause your process:
- The size and growth rate of your direct markets
- Your company’s market share in their addressable markets and how it compares to competitors
- Volume, revenue, and profitability by customer and product over a trailing 3-year period
Once you know these elements, incorporate them into a detailed financial model that projects your performance over the next five years (make sure you also have monthly projections for the next two years). If you do this, you’ll build credibility with buyers and disarm much of the skepticism that naturally occurs during sales processes.
Also, try your best to predict what buyers will be asking during the sale process. Have open conversations with your investors, executives, and investment bankers to understand your strengths and weaknesses. Save yourself from having to scramble to produce appropriate reports and information in the heat of the sale process. Having a general idea of what buyers are looking for and preemptively having answers to those questions, disseminating the information to those who need to know, and confirming overall readiness will ensure that buyers feel confident and comfortable when meeting with you and your team.
Truly best-in-class companies bring in third parties to pre-opine on the state and opportunities of the business. Spend a little money on pre-due diligence, including sell-side quality of earnings reports, tax diligence, market studies, and IT. The cost is minor as it compares the value of the company, and these third-party stamps of approval from credible advisors will give your buyers confidence that the company is what it is and not see (or go looking for) ghosts during the sprint to the finish line.
Under-Resourcing with Interim Staff
The single biggest mistake I saw time and again during my private equity career was understaffing the sale process. It’s nearly impossible to both aggressively run a sale process and proactively run your company.
Most sellers’ intuition is to put the bulk of the workload on their investment bankers’ shoulders. Your investment bankers can help, but you are not paying them to be your accountants, lawyers, market strategists, and data entry specialists. You hire top investment bankers to intimately know the buyers, appropriately frame the opportunity, and manage a process to optimize valuations. Don’t distract them by getting them bogged down in the weeds. Let them focus on the job you hired them for and they’ll deliver outstanding results.
Every business undergoing a sale process should bring in some level of interim staff (ranging from interim controllers to interim CFOs) to either help with the production of analyses and data requests or help manage day-to-day operations. This is a relatively small expense compared to the sums that will be gained by running a fast and credible process. If you don’t resource appropriately, something usually has to give: either your sale process, your operating results, or both.
We work daily to help top private equity firms, and their portfolio companies and proactively-managed independent companies more effectively assess opportunities and build value. It’s hard to know who is good: we make it our business to be the expert of experts.