Last year set new records for M&A activity. Big corporations drove the market, and that momentum was also reflected in the lower middle market and Main Street. But not everyone got a deal done last year. Let’s review why some business transitions go sour:
Price Expectations. The number one reason deals fail is unrealistic price expectations. Get a business valuation or talk with an M&A advisor for professional advice on what your business would sell for in today’s marketplace.
If your business has revenues of $5 million or more, you can (and should in my opinion) go to market without a published asking price. However, you and your advisor still need to agree on a realistic benchmark. Set your expectations too high and you’ll price yourself out of the market.
Financial Reporting Quality. Most of our clients use compiled financial statements, and some go a step further with reviewed statements. That’s acceptable, but you’ll do better with audited financial statements a year or two before you plan to sell.
With validated financial accuracy, you increase buyer confidence, shorten due diligence times, and help get your company sold. In fact, I’ve had buyers tell me they’ve paid a quarter point to half point more on deal multiples for a business with strong audited financial statements.
As your business size grows, those quarter points can make a big difference in the final purchase price and substantially outweigh the cost of an audit. For example, a company with $2 million EBITDA with an additional .25 multiple equals $500,000 in business value.
Renegotiating. Once you’ve settled on terms for a sale, stick to them. Resist the urge to renegotiate, even if your business has a strong 2-3 months during the due diligence process.
According to the latest IBBA Market Pulse report, most lower middle market deals spent three months on due diligence between signed letter of intent and close. That means you’re agreeing to terms 90 days before a sale.
With the great economy last year, some business owners ended the year with revenues or contracts that significantly exceeded projections. When that happens, you have to weigh the possible increase in business value against the time and expense already invested in the deal. Backtracking on agreements can weaken trust, delay negotiations, add costs and threaten the overall deal.
Customer Concentration. Long-term relationships are great, but customer concentration still presents a risk. Some buyers won’t even consider a business if the number one customer represents more than 15-20 percent of revenues. And those that do look at your business will most likely either pay less or structure a deal with an earn out to lessen the risk.
Going Solo. Many business owners try to sell their business themselves. Most likely your business is your largest asset, the process is something you’ve never done before and you have significant emotional ties to the company you built. Together, that makes a poor equation for success. An advisor with skills and experience will out-earn their fees by getting you a higher price for your business.
by Scott Bushkie, CBI, M&AMI
With more than 20 years in the Mergers and Acquisitions (M&A) industry, Scott is a recognized leader in the field, providing exit strategies, business valuations, and M&A advisory services to business owners in the lower middle market. He has successfully executed sales to domestic and international buyers, private equity firms, family offices, and strategic buyers.
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