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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.
Sure enough, they usually are the smartest guy in the room
and could do whatever they want to achieve. For example, these capable
entrepreneurs could fix their own dental cavity but why not get a true expert,
the dentist? After all, dentists have trained and spent their career taking
care of patients' teeth. It is the same for transition of the business. Find
the experts and put your time into what matters more.
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 UBS Bank (Canada), Wealth Management. She focuses on transitions for family businesses and closely held small to medium-sized enterprises, as they sell and move from being business owners to being managers of their wealth.
Ms. Loewen is also the author of Money
Magnet: How to Attract Investors to Your Business.
You can follow her on Twitter @jacolineloewen.
