EXPERT: TOP 5 MISTAKES IN SELLING A BUSINESS
Merger Advisors Network news release
Merger Advisors Network, a Santa Monica, California based mergers and acquisitions advisory firm today released its new report entitled "Five of the most common assumptions business owners make when they decide to sell their business, and why they are mistakes. Myth and reality check...".
A complete version of the twenty-four page report is available for free via the company's web site, http://www.sell-my-business.org. What follows represents a condensed summary of the report.
When an owner is selling his business, he is not selling his product or service to customers. Spending time doing a job you've never done to save one dollar in commissions you might pay and advisor, often comes at a greater expense. The expense is that you stop driving dollars to the bottom line, and depending on the multiple you receive, a dollar on the bottom line might be worth three to seven dollars during a sale.
Using a professional, your deal is likely to close faster, at a higher price, and with better terms. You are almost always better off running your business rather than selling your business on your own.
The following represent five of the most common myths and realities faced by business owners who decide to "pull the trigger" and put their business up for sale.
ASSUMPTION ONE
I Built this Company and I'm Best Able to Sell It for it Maximum Value.
Myth - You've spent your life marketing and selling yourself and your business. You are the top producer, and you know every detail of every aspect of your business. You know what you want, and you are best able to efficiently and effectively close the deal that is best for you.
The Truth - You are correct! You are your company's biggest asset, and you are best able to sell yourself and your company. The only part you've missed is that you should continue to sell your company - to customers.
To dedicate yourself full time to selling your business, or even part time, is the worst decision owners can make, for several reasons. Here are two.
First, when an owner is selling his business, he is not selling to customers. Assuming a conservative multiple on the sale of your profits of 3 times EBITDA, let's compare the value of your time spent. When you are selling your business, you are getting 1 dollar for every dollar you negotiate. When you drive a dollar of profit to the bottom line, you receive three dollars for every dollar you earn. In fact, when a company leader decides to become his own merger advisor, more often than not, sales and profits slip. In this case, the owner is losing money, paying 3 dollars in an attempt to negotiate one more in the sale of his business. When you are phenomenal at selling, this disparity is even more pronounced.
What is a merger advisor?
Second, when an owner is selling his own business, he is not likely able to bring thousands of buyers to the table in a coordinated way to create competition and multiple offers. Instead, most owners have one or two customers or competitors who they know and who have made gestures of interest in the past. When the owner approaches one or two buyers at a time, he puts himself in a horrible position with little leverage (and is doing so while he could be growing his bottom line). Unless you have a buyer ready to strike, who senses that his option to strike might disappear; you are not at maximum leverage in your deal. Just having a professional advisor involved gives the impression that you can and will create options for your company. Merger Advisors Network has been involved in several deals where a friendly buyer who had circled a deal for years finally closed when we generated the interest from several other buyers who were approaching the table.
When you get a professional involved, your deal is likely to close faster and at a higher price. You are always better off running your business rather than selling a business.
ASSUMPTION TWO
I've Decided to Get a Valuation to Determine My Company's Real Worth.
Myth - Although the price you might receive for your business shouldn't be the only consideration when deciding whether to sell, it's often the first thing on most owners' minds. If you don't know its value, then you need a professional appraiser or a valuation to figure this out.
The Truth - Clearly price matters, but one very wise mentor once said "You pick the price: I'll pick the terms." More on this later...
Regardless of what anyone tells you, the fact is that your business is worth what a buyer is willing to pay. There is no set formula. Although a professional valuation or appraisal is useful for some purposes, it provides almost no benefit in the process of actually selling a company.
Here's why. Each competent buyer will certainly do their own valuation based on the factors that matter to them. Your independently prepared professional business valuation will not convince a buyer: most buyers won't even look at it. Even worse, let's say you undervalue your company relative to what the buyer sees - now you've paid a lot of money to negotiate against yourself.
Merger Advisors Network suggests that any professional who is promising to help you sell your business from a formal valuation is likely making his living doing valuations, not closing sales. We never price a deal - Iwe uncover and explain to each buyer all of the types of value a seller offers. Buyers should price deals.
ASSUMPTION THREE
Investment Banks Require Retainers, so To Get the Best Service I Need to Pay a Sizable Retainer.
Myth - All top professionals require retainers. This is just a way for them to figure out who is serious about selling and who isn't. In addition, there are real costs associated with selling my business "the right way" so it makes sense to pay more to get more.
The Truth - There are many different business models that merger advisors use to run their businesses. We believe the best model is the one that aligns your rewards and incentives as closely as possible to your advisors' rewards and incentives. The best way to do this is to hire an advisor who works on a contigent fee basis, with as small an upfront retainer as possible, and little in the way of monthly costs and expenses. Why?
Similar to advisors who sell valuations, advisors who seek retainers and monthly payments focus on their earnings, which come from retainers and monthly payments. This focus forces the advisor into a business model where having more clients is more important than having the best clients, where signing the next client is more important than signing the next deal, and where your goal to sell your company for maximum value might get lost in the hustle.
Merger Advisors have worked in different types of retainer and fee arrangements, and we believe that the arrangement that made us most focused on the best end result for our clients was the success fee model. Here's why.
What better way for an advisor to earn more than for you to earn more? What better way for the advisor to focus on closing your deal than to get paid only when the deal closes? What better way to ensure that the advisor only takes clients for whom he believes he can do a fantastic job then to only compensate him when he does a fantastic job? When the advisor works for success based commissions, he usually turns down more clients than he accepts; he is focused on fewer and better clients; and he is always determined to move each deal he has forward as fast as possible, at the highest possible value. This is the power of alignment.
ASSUMPTION FOUR
The Best Price is Always the Best Price.